Which one of the following sets of dividend payments best meets the definition o

Question

Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model?

no dividends for 5 years, then increasing dividends forever

1 percent increase in dividends annually for 2 years, then 1.25 percent increase in annual dividends forever

decreasing dividends for 6 years followed by one final liquidating dividend payment

dividends payments which increase by 2, 3, and 4 percent respectively for 3 years followed by a constant dividend thereafter

dividend payments of $10 per share annually for 5 years followed by dividends which increase by 3 percent annually thereafter

Explanation / Answer

Two stage typically means there are two stages of growth in dividends. In the above example, the option (a)

ie 1% increase in dividends annually for frist two years and 1.25% thereafter in annual dividends offers the best case for a two stage dividend discount model.

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