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Sugar Cookies will pay an annual dividend of $1.23 a share next year. The firm expects to increase this dividend by 8 percent per year the following four years and then decrease the dividend growth to 2 percent annually thereafter. Which one of the following is the correct computation of the dividend for Year 7?
a. ($1.23)× (1.08)4×(1.02)4
b. ($1.23) ×(1.08 ×4) ×(1.02 ×3)
c. ($1.23) ×(1.08)4×(1.02)3
d. ($1.23) ×(1.08)4×(1.02)2
e. ($1.23) ×(1.08 ×4) ×(1.02 ×2)

Respuesta :

sebastiansierraocm

Answer:

The correct answer is c)($1.23) ×(1.08)4×(1.02)3

Explanation:

The c) option correctly use the future value formula to compute the future value of the dividen by the year 7.

The fure value formula is FV = PV (1 + i) n

where:

  • FV = Future value
  • PV = Present value (in this case $1.23)
  • i = interest rate (in this case, 8% or 0.08 for the first 4 years, and thereafter, 2% or 0.02 for the last three years)
  • n = number of periods (in this case, number of years).

So replacing you get: FV = $1.23 (1+0,08)4 x (1+0,02)3

                                          =$1.23(1,08)4 x (1,02)3

                                          =16,2

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