Indigo Ink Supply paid a dividend of $4.5 last year on its common stock. It is expected that this dividend will grow at a rate of 8% for the next five years. After that, the company will settle into a slower growth pattern and plans to pay dividends that will grow at a rate of 3.6% per year. Investors require a return of 11% on the stock. a. What will be the dividend paid out for the next six years?

Question

Reed Thomas

Business

26 January, 08:00

Indigo Ink Supply paid a dividend of $4.5 last year on its common stock. It is expected that this dividend will grow at a rate of 8% for the next five years. After that, the company will settle into a slower growth pattern and plans to pay dividends that will grow at a rate of 3.6% per year. Investors require a return of 11% on the stock. a. What will be the dividend paid out for the next six years?

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Edwin Peck · Answer 1

D1 = $4.86

D2 = $5.25

D3 = $5.67

D4 = $6.12

D5 = $6.61

D6 = $6.85

Explanation:

Dividend paid by Indigo Ink Supply at year 0 = Do = $4.5

Growth rate for the first five years = 8%

Growth rate for the sixth year = 3.6%

The dividend paid out for the next six years are,

D1 = Do (1 + growth rate)

D1 = $4.5 (1+8%) = $4.86

D2 = $4.86 (1+8%) = $5.25

D3 = $5.25 (1+8%) = $5.67

D4 = $5.67 (1+8%) = $6.12

D5 = $6.12 (1+8%) = $6.61

D6 = $6.61 (1+3.6%) = $6.85