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10 January, 21:00

Dunkin' Brands just paid an annual dividend of $1.10 a share. The firm expects to increase this dividend by 8 percent per year the following three 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. (S1.10) (1.08 x 3) (1.02 4) B. (S1.10) (1.08 3) (1.02 x 3) C. (S1. 10) (1.08) (1.02) D. (SI. 10) (1.08) (102) E. (S1.10) (1.08) (1.02)

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  1. 10 January, 21:21
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    Dividend in year 7 will be calculated as follows:

    D3 = Do (1+g) n = 1.10 (1+0.08) 3

    D7 = Do (1+g) n (1+g) n = 1.10 (1.08) 3 (1+0.02) 4 = $1.4999

    Explanation:

    In the first instance, we need to calculate dividend in 3 year's time based on current dividend paid at 8% growth rate. Thereafter, we also need to calculate dividend from from year 4 to year 7 (4 years) based on the new growth rate of 2%. The combination of these growth regimes gives the dividend in year 7.
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