Dividend Growth
The TICO Corporation currently pays a cash dividend of $5 per share. You believe the dividend will be increased by 4 percent each year indefinitely. How big will the dividend be in eight years? Here we have a cash dividend growing because it is being increased by management, but, once again, the calculation is the same: Future value =$5 ×1.048 =$5 ×1.3686= $6.84 The dividend will grow by $1.84 over that period. Dividend growth is a subject we will return to in a later chapter.
C O N C E P T Q U E S T I O N S
a What do we mean by the future value of an investment?
b What does it mean to compound interest? How does compound interest differ from simple interest?
c In general, what is the future value of $1 invested at r per period for t periods?