Question

The Brown Jug has paid annual dividends of $0.61, $0.64, $0.71, $0.82, and $0.88 per share over the past 5 years, respectively. What is the geometric average dividend growth rate for this period?
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a. 8.51 percent
b. 8.97 percent
c. 9.10 percent
d. 9.59 percent
e. 10.21 percent

Answer 1

Answer:

Option (d) 9.59%

Explanation:

Data provided in the question:

Annual dividends paid by the Brown jug

$0.61, $0.64, $0.71, $0.82, and $0.88 per share over the past 5 years

Now,

Present value = $0.61

Future value = $0.88

Time = 4 years                    [as there is no interest for the year 1]

Now,

Future value = Present value × (1 + r )ⁿ

here,

r is the geometric average dividend growth rate

$0.88 = $0.61 × (1 + r )⁴

or

(1 + r )⁵ = 1.4426

or

1 + r = 1.0959

or

r = 0.0959

or

r = 0.0959 × 100% = 9.59%

Hence,

Option (d) 9.59%