Four years ago, Bling Diamond, Inc., paid a dividend of $2.65 per share. The firm paid...

Four years ago, Bling Diamond, Inc., paid a dividend of $2.65 per share. The firm paid a dividend of $3.07 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 4 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

Expert Solution

Dividend in 7 years will be $ 3.99

Step-1:Growth rate of dividend over last 4 years

FV		=	PV	*	(1+g)^n		Where,
$ 3.07		=	$ 2.65	*	(1+g)^4		FV	=	$ 3.07
1.158491		=	(1+g)^4				PV	=	$ 2.65
1.158491 ^ (1/4)		=	1+g				g	=	?
1.037464		=	1+g				n	=	4
0.037464		=	g

So, dividend growth rate was 3.75%.

Step-2:Cash dividend in 7 years

Cash dividend in 7 years	=	D0(1+g1)^5(1+g2)^2	Where,
	=	3.07(1+0.0375)^5(1+0.04)^2	g1	=	3.75%
	=	$ 3.99			g2	=	4%
		$ 3.99

jeff jeffy answered 1 year ago

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