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.
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
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
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
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
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