Modular Systems Inc

Multiple Choice

Modular Systems Inc. just paid dividend D0, and it is expecting both earnings and dividends to grow by 0 percent in Year 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 equili-brium price, P0 = $49.87. What is the expected value of the next dividend, D1? (Hint: Draw a time line and then set up and solve an equation with one unknown, D1.)

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