Modular Systems Inc

question 67

Multiple Choice

Modular Systems Inc.just paid dividend D₀, and it is expecting both earnings and dividends to grow by 0 percent in Year 1 and 2, by 5 percent in Year 3, and at a rate of 10 percent in Year 4 and thereafter.The required return on Modular is 15 percent, and it sells at its equilibrium price, P₀ = $49.87.What is the expected value of the next dividend, ? (Hint: Draw a time line and then set up and solve an equation with one unknown, .)

• A) It cannot be estimated without more data.
• B) $1.35
• C) $1.85
• D) $2.35
• E) $2.85

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