Otobai Motor Company just paid a dividend of $1.40. Analysts expect its dividend to grow at a...

Question:

Otobai Motor Company just paid a dividend of $1.40. Analysts expect its dividend to grow at a rate of 18% for the next three years and then a constant rate of 5% thereafter. What is the expected dividend per share at the end of year 5?

a) $2.35

b) $2.54

c) $2.91

d) $1.50

Cash Dividends:

While companies have no obligation to pay dividends to common stockholders, companies in mature stage of growth reward shareholders with regular dividends and share repurchases. Dividend paying companies aim to maintain steady annual growth in dividends, which attracts income investors.

Answer and Explanation:

.

We can calculate the dividend for each of the given 5 years.

  • Dividend for Year 1 = {eq}1.40 * ( 118 / 100 ) = $1.65 {/eq}
  • Dividend for Year 2 = {eq}1.65 * ( 118 / 100 ) = $1.95 {/eq}
  • Dividend for Year 3 = {eq}1.95 * ( 118 / 100 ) = $2.30 {/eq}
  • Dividend for Year 4 = {eq}2.30 * ( 105 / 100 ) = $2.42 {/eq}
  • Dividend for Year 5 = {eq}2.42 * ( 105 / 100 ) = $2.54 {/eq}

Therefore,

  • Option (B) {eq}$2.54 {/eq}

Learn more about this topic:

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Cash Dividends & Dividend Payment

from Finance 101: Principles of Finance

Chapter 16 / Lesson 1
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