A4 8e ABC Co. has the following dividend payment history for the last five years, with the most recent dividend being $1.10: $0.50, $0.60, $0.80, $1.00, $1.10. Historical growth rate estimation What...


A4 8e


ABC Co. has the following dividend payment history for the last five years, with the
most recent
dividend being $1.10: $0.50, $0.60, $0.80, $1.00, $1.10.



Historical growth rate estimation


What is the compound growth rate of dividends based on the last five years of dividends data?


Compounded Growth Rate=(Dividend in Year 5/Dividend in Year 1)(1/N)−


Compounded Growth Rate=(1.1/0.5)(1/5)−1


Compounded Growth Rate=2.2(1/5)−1


Compounded Growth Rate = 1.1708 – 1


Compounded Growth Rate = 17.08%



































Year



Dividend



1



$1.10



2



$0.50



3



$0.60



4



$0.80



5



$1.00



6



$1.10



ABC has a retention ratio of 0.9 and a historical return on equity (ROE) of 0.25. Using these two additional pieces of information, calculate an alternative estimate of dividend growth rate, g.


Growth rate = Retention ratio x ROE


ROE=0.25


Retention ratio =0.9


Growth rate =0.9 × 0.25=0.225


Growth rate =0.225





Alternative Growth rate =0.225


e. Calculate the expected growth rate of dividends by averaging the growth rates?



Jun 09, 2022
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