Question

Suppose Potter Ltd. just issued a dividend of $2.50 per share on its common stock. The company paid dividends of $2.00, $2.07, $2.24, and $2.34 per share in the last four years. What was the dividend growth rate for each year? (Do not round intermediate

Answer 1

Answer:

Explanation:

Using dividend growth model formula for finding dividend per year can be used to find the growth rate per year;

The formula would be D1 = D0(1+g)

and D2 = D1(1+g)

D3 = D2 (1+g)  and so on....

Starting with 2.00 dividend,  growth rate from yr1-yr2;

2.07 = 2.00*(1+g)

Divide both sides by 2.00;

1+g = 2.07/ 2.00

1+g = 1.035

g = 1.035-1

g ( y1-y2) = 0.035 or 3.5%

Growth rate from yr2-yr3;

2.24 = 2.07(1+g)

Divide both sides by 2.07;

2.24/2.07 = 1+g

1.0821 = 1+g

1.0821-1 = g

g= 0.0821 or 8.21%

Therefore, g(y2-y3) = 8.21%

Growth rate from yr3-yr4;

2.34 = 2.24(1+g)

Divide both sides by 2.24;

2.34/2.24 = 1+g

1.0446 = 1+g

1.0446 -1 =g

g =0.0446 or 4.46%

Therefore, g(y3-y4) = 4.46%

Growth rate from yr4-yr5;

2.50 = 2.34(1+g)

2.50/2.34 = 1+g

1.0684 = 1+g

1.0684-1 = g

g=0.0684 or 6.84%

Therefore, g(y4-y5) = 6.84%