a4 8f
apologies, here are the subparts with questions and the answers from a -g. the question is f, at the bottom:)
8. 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
a. 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%
b. Calculate the year-to-year growth rates in dividends.
Year (n)
|
Dividends (D)
|
*Growth rate (G)
|
*Workings (Dn/Dn-1) - 1
|
1
|
0.50
|
-
|
|
2
|
0.60
|
20.00%
|
0.60 / 0.50 -1 * 100
|
3
|
0.80
|
33.33%
|
0.80 / 0.60 - 1 * 100
|
4
|
1.00
|
25.00%
|
1.00 / 0.80 - 1 * 100
|
5
|
1.10
|
10%
|
1.10 / 1.00 - 1 * 100
|
|
Average
|
22.08%
|
|
C. What is the average year-to-year dividend growth rate?
Year
|
Dividend
|
1
|
$1.10
|
2
|
$0.50
|
3
|
$0.60
|
4
|
$0.80
|
5
|
$1.00
|
6
|
$1.10
|
d. 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 in parts (a), (c), and (d).
Year
|
Dividend
|
1
|
$1.10
|
2
|
$0.50
|
3
|
$0.60
|
4
|
$0.80
|
5
|
$1.00
|
6
|
$1.10
|
Average growth rate is 20.55%
Average growth rate = (17.08% + 22.08%+ 22.50%) /3
Average growth rate = 20.55%
Dividend growth model
f. ABC’s share price is currently $70, and the most recent dividend paid is $1.10 per share. Using the expected growth rate estimated in (e) above, calculate the cost of equity using the dividend growth model.