Concept explainers
A firm has paid dividends of $1.02, $1.10, $1.25, and $1.35 over the past 4 years, respectively. What is the average
To determine: The dividend growth rate.
Introduction:
Dividend refers to the return on the equity capital. Dividend growth rate refers to the rate at which the dividend grew for a certain period.
Answer to Problem 14.2CTF
The “average dividend growth rate” is 9.83 percent.
Explanation of Solution
Given information:
A firm paid dividends amounting to $1.02 in Year 1, $1.10 in Year 2, $1.25 in Year 3, and $1.35 in Year 4.
The formula to compute the percentage change in dividend each year:
The formula to calculate the “average dividend growth rate”:
Compute the percentage change in dividend for Year 2:
Hence, the percentage change in dividend for Year 2 is 7.84 percent.
Compute the percentage change in dividend for Year 3:
Hence, the percentage change in dividend for Year 3 is 13.64 percent.
Compute the percentage change in dividend for Year 4:
Hence, the percentage change in dividend for Year 4 is 8 percent.
Compute the “average dividend growth rate”:
Hence, the “average dividend growth rate” is 9.83 percent.
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Chapter 14 Solutions
Fundamentals of Corporate Finance Standard Edition