Question

Four years ago, Bling Diamond, Inc., paid a dividend of $2.95 per share. The firm paid a dividend of $3.37 per share yesterday. Dividends will grow over the next five years at the same rate they grew over the last four years. Thereafter, dividends will grow at 6 percent per year.

What will the firm’s cash dividend be in seven years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Cash dividend           $

Answer 1

Dividend four years ago = $2.95 per share

Current Dividend paid(D0) = $3.37

Calculating the Growth rate of Dividend in the last 4 years:-

Growth rate of Dividend in the last 4 years = (Current Dividend/Past dividend)^(1/4) - 1

Growth rate of Dividend in the last 4 years = ($3.37/$2.95)^(1/4) - 1

Growth rate of Dividend in the last 4 years = 1.033837 - 1

Growth rate of Dividend in the last 4 years = 3.3837%

- Dividends will grow over the next five years at the same rate they grew over the last four years(g) = 3.3837% per year

- Dividend growth rate therafter(g1) = 6% per year

Calculating Cash Dividend in 7th year(D7):-

D7 = D0*[(1+g)^5]*[(1+g1)^2]

D7 = $3.37*[(1+0.033837)^5]*[(1+0.06)^2]

D7 = $3.37*(1.18102843873)*(1.1236)

D7 = $4.47

So, the firm’s cash dividend be in seven years is $4.47