USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider a firm that has just paid a dividend of $1.5. An analyst expects dividends to grow at a rate of 9 percent per year for the next three years. After that dividends are expected to grow at a normal rate of 5 percent per year. Assume that the appropriate discount rate is 7 percent.
-Refer to Exhibit 8.4. The dividends for years 1, 2, and 3 are
A) $1.5, $2.0, and $2.05.
B) $1.64, $1.78, and $1.94.
C) $1.64, $1.94, and $2.24.
D) $1.5, $2.40, and $3.30.
E) $2.07, $2.14, and $2.21.

Question

Quizplus · Accepted Answer

The dividends for years 1, 2, and 3 are $1.64, $1.78, and $1.94, respectively. This can be calculated using the formula for the present value of a growing perpetuity, which is:PV = D / (r - g)where:PV is the present valueD is the dividendr is the discount rateg is the growth rateIn this case, the dividend for year 1 is $1.5, the growth rate for years 1-3 is 9%, and the growth rate for years 4 and beyond is 5%. The discount rate is 7%.Plugging these values into the formula, we get:PV = 1.5 / (0.07 - 0.09) = $1.64The dividend for year 2 is $1.64 * 1.09 = $1.78. The dividend for year 3 is $1.78 * 1.09 = $1.94.