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Exercise 5.4 · Q12
Q.

Dividend: A sum of money paid regularly by a company to its shareholders out of its profits.

A financial analyst is analyzing the prospects of a certain company. The company pays an annual dividend on its stock. A dividend of ₹500 has just been paid and the analyst estimates that the dividends will grow by 20% per year for the next 3 years, followed by annual growth of 10% per year for 2 years. (Adapted from Finance and Growth)

(a) Complete the following table:

Year12345
Dividend

(b) Then calculate the total dividend that will be paid for the next five years.

Sikkim CbseNCERTSubjective· 3mImportance★★★★★est
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Grow the just-paid dividend ₹500\text{₹}500 by 20%20\% for 3 years, then by 10%10\% for the following 2 years, tabulate each year's dividend, and add them up.

Growth by a fixed percentage each period: Dt=Dt−1(1+g)D_{t}=D_{t-1}(1+g), where Dt−1=D_{t-1}= previous period's dividend, g=g= growth rate for that period (as a decimal).

  1. D0=₹500D_0=\text{₹}500 (just paid; growth starts from here).
  2. Years 1–3 grow at g=20%=0.20g=20\%=0.20:
    • D1=500(1.20)=₹600D_1=500(1.20)=\text{₹}600
    • D2=600(1.20)=₹720D_2=600(1.20)=\text{₹}720
    • D3=720(1.20)=₹864D_3=720(1.20)=\text{₹}864
  3. Years 4–5 grow at g=10%=0.10g=10\%=0.10:
    • D4=864(1.10)=₹950.4D_4=864(1.10)=\text{₹}950.4
    • D5=950.4(1.10)=₹1045.44D_5=950.4(1.10)=\text{₹}1045.44
  4. Complete table (part a):

| Year | 1 | 2 | 3 | 4 | 5 |

|---|---|---|---|---|---| …

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