Weston Corporation just paid a dividend of $2 a share (i.e., D0 = $2). The dividend is expected to grow 12% a year for the next 3 years and then at 5% a year thereafter. What is the expected dividend per share for each of the next 5 years? Do not round intermediate calculations. Round your answers to the nearest cent.

The correct answer for 5 years is $2.24, $2.5 , $2.8, $2.9 and $3.1 (approx.)

Explanation:

According to the scenario, the computation of the given data are as follows:

Dividend = $2

For first 3 years = 12% per year

For 4th and 5th year = 5% per year

We can calculate the dividend for each year by using following formula:

Dividend = Dividend for last year × ( 1 + growth rate)

So, D0 = $2

Dividend For 1st year (D1) = $2 × 1.12 =  $2.24

Dividend for 2nd year (D2) = $2.24 × 1.12 = $2.5088

Dividend for 3rd year (D3) = $2.5088 × 1.12 = $2.809856

Dividend for 4th year (D4) = $2.809856 × 1.05 = $2.9503488

Dividend for 5th year (D5) = $2.9503488 × 1.05 = $3.09786624 or 3.1 (approx)

Statement a. is correct.

Explanation:

The effective annual rate is always higher than the nominal interest rate, as the formula is clear for any number of periods, for any interest rate:

Effective Annual Rate of return =

Further if we calculate the present value of annuity due and ordinary annuity assuming 6 % interest rate, then:

Present value of annuity due =

= 1.06 $400.95

= $425.0089

Present value of ordinary annuity =

= $150 2.6730

= $400.95

Therefore, value of annuity due is more than value of ordinary annuity.

Statement a. is correct.