Four years ago, Bling Diamond, Inc., paid a dividend of $1.73 per share. The firm paid a dividend of $2.36 per share yesterday. Dividends will grow over the next five years at the same rate they grew over the last four years. Thereafter, dividends will grow at 5% per year. What will the firm’s cash dividend be in seven years?

$2.90 approx

Explanation:

The computation of firm’s cash dividend be in seven years

First we need to find out the

Growth Rate = (Last Dividend ÷ Dividend 4 years ago)^(1 ÷ 4) - 1

= ($2.36 ÷ $1.73)^(1 ÷ 4) - 1

= $1.36^0.35 - 1

=  1.113624092  - 1

= 0.113624092

= 11.36%

Now we calculate for 5 years

Dividend in 5 years = $2.36 × 1.113624092

= $2.628

and Dividend in 7 Years = Dividend in 5 years × (1 + 5%)^2

= $2.628 × 1.05^2

= $2.628 × 1.1025

= $2.90 approx

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