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 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-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% 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 ABC has a retention ratio of 0.9 and a historical return on equity (ROE) of 0.25. 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. What is the expected growth rate of dividends by averaging the growth rates from the above data?
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 8g
Apologies, hopefully this is sufficient:
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
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%
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% |
|
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 |
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. What is the expected growth rate of dividends by averaging the growth rates from the above data?
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