Question

DPS CALCULATION

Weston Corporation just paid a dividend of $3 a share (i.e., D₀ = $3). The dividend is expected to grow 8% a year for the next 3 years and then at 4% a year thereafter. What is the expected dividend per share for each of the next 5 years? Round your answers to two decimal places.

D₁ = $
D₂ = $
D₃ = $
D₄ = $
D₅ = $

Answer 1

Solution:

The expected dividend per share for each of the next 5 years is calculated as follows:

Dividend for Year 1 :

D₁ = D₀ * ( 1 + g % )

As per the information given in the question we have

D₀ = $ 3   ; g = 8 % = 0.08

Applying the above values in the formula we have

D₁ = 3 * ( 1 + 0.08)   = 3 * 1.08 = $ 3.24

Dividend for Year 2 :

D₂ = D₁ * ( 1 + g % )

As per the information given in the question we have

D₁ = $ 3.24   ; g = 8 % = 0.08

Applying the above values in the formula we have

D₂ = 3.24 * ( 1 + 0.08)   = 3.24 * 1.08 = $ 3.50

Dividend for Year 3 :

D₃ = D₂ * ( 1 + g % )

As per the information given in the question we have

D₂ = $ 3.50   ; g = 8 % = 0.08

Applying the above values in the formula we have

D₃ = 3.50 * ( 1 + 0.08)   = 3.50 * 1.08 = $ 3.78

Dividend for Year 4 :

D₄ = D₃ * ( 1 + g % )

As per the information given in the question we have

D₃ = $ 3.78   ; g = 4 % = 0.04

Applying the above values in the formula we have

D₄ = 3.78 * ( 1 + 0.04)   = 3 * 1.04 = $ 3.93

Dividend for Year 5 :

D₅ = D₄ * ( 1 + g % )

As per the information given in the question we have

D₄ = $ 3.93 ; g = 4 % = 0.04

Applying the above values in the formula we have

D₅ = 3.93 * ( 1 + 0.04)   = 3.93 * 1.04 = $ 4.09

Thus the solution is

D₁ = $ 3.24              

D₂ = $ 3.50              

D₃ = $ 3.78              

D₄ = $ 3.93              

D₅ = $ 4.09