Fundamentals of Corporate Finance Standard Edition
Fundamentals of Corporate Finance Standard Edition
10th Edition
ISBN: 9780078034633
Author: Stephen Ross, Randolph Westerfield, Bradford D. Jordan
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Textbook Question
Chapter 14, Problem 14.2CTF

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 dividend growth rate?

Expert Solution & Answer
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Summary Introduction

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:

Percentage change in dividendin the current year}=Current dividendPrevious year dividendPrevious year dividend×100

The formula to calculate the “average dividend growth rate”:

Averagedividendgrowth rate}=(Percentage changein dividendfor the first year)+(Percentage changein dividendfor the second year)++(Percentage changein dividendfor the Nth year)Number of years

Compute the percentage change in dividend for Year 2:

Percentage changein dividendin Year 2}=Dividend in Year 2 Dividend in Year 1Dividend in Year 1×100=$1.10$1.02$1.02×100=$0.08$1.02×100=7.84%

Hence, the percentage change in dividend for Year 2 is 7.84 percent.

Compute the percentage change in dividend for Year 3:

Percentage changein dividendin Year 3}=Dividend in Year 3 Dividend in Year 2Dividend in Year 2×100=$1.25$1.10$1.10×100=$0.15$1.10×100=13.64%

Hence, the percentage change in dividend for Year 3 is 13.64 percent.

Compute the percentage change in dividend for Year 4:

Percentage changein dividendin Year 4}=Dividend in Year 4 Dividend in Year 3Dividend in Year 3×100=$1.35$1.25$1.25×100=$0.10$1.25×100=8%

Hence, the percentage change in dividend for Year 4 is 8 percent.

Compute the “average dividend growth rate”:

Averagedividendgrowth rate}=(Percentage changein dividendfor Year 2)+(Percentage changein dividendfor Year 3)+(Percentage changein dividendfor Year 4)3=7.84%+13.64%+8%3=29.48%3=9.83%

Hence, the “average dividend growth rate” is 9.83 percent.

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Chapter 14 Solutions

Fundamentals of Corporate Finance Standard Edition

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