Fundamentals of Corporate Finance
Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 14, Problem 14.2CTF

A firm has paid dividends of $1.02, $1.10, $1.25, and $1.35 over the past 4 years, respectively. What is the average dividend growth rate?

Expert Solution & Answer
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Summary Introduction

To determine: The dividend growth rate.

Introduction:

Dividend refers to the return on the equity capital. Dividend growth rate refers to the rate at which the dividend grew for a certain period.

Answer to Problem 14.2CTF

The “average dividend growth rate” is 9.83 percent.

Explanation of Solution

Given information:

A firm paid dividends amounting to $1.02 in Year 1, $1.10 in Year 2, $1.25 in Year 3, and $1.35 in Year 4.

The formula to compute the percentage change in dividend each year:

Percentage change in dividendin the current year}=Current dividendPrevious year dividendPrevious year dividend×100

The formula to calculate the “average dividend growth rate”:

Averagedividendgrowth rate}=(Percentage changein dividendfor the first year)+(Percentage changein dividendfor the second year)++(Percentage changein dividendfor the Nth year)Number of years

Compute the percentage change in dividend for Year 2:

Percentage changein dividendin Year 2}=Dividend in Year 2 Dividend in Year 1Dividend in Year 1×100=$1.10$1.02$1.02×100=$0.08$1.02×100=7.84%

Hence, the percentage change in dividend for Year 2 is 7.84 percent.

Compute the percentage change in dividend for Year 3:

Percentage changein dividendin Year 3}=Dividend in Year 3 Dividend in Year 2Dividend in Year 2×100=$1.25$1.10$1.10×100=$0.15$1.10×100=13.64%

Hence, the percentage change in dividend for Year 3 is 13.64 percent.

Compute the percentage change in dividend for Year 4:

Percentage changein dividendin Year 4}=Dividend in Year 4 Dividend in Year 3Dividend in Year 3×100=$1.35$1.25$1.25×100=$0.10$1.25×100=8%

Hence, the percentage change in dividend for Year 4 is 8 percent.

Compute the “average dividend growth rate”:

Averagedividendgrowth rate}=(Percentage changein dividendfor Year 2)+(Percentage changein dividendfor Year 3)+(Percentage changein dividendfor Year 4)3=7.84%+13.64%+8%3=29.48%3=9.83%

Hence, the “average dividend growth rate” is 9.83 percent.

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Chapter 14 Solutions

Fundamentals of Corporate Finance

Ch. 14.5 - Prob. 14.5ACQCh. 14.5 - Prob. 14.5BCQCh. 14.6 - Prob. 14.6ACQCh. 14.6 - Why do you think we might prefer to use a ratio...Ch. 14.7 - What are flotation costs?Ch. 14.7 - How are flotation costs included in an NPV...Ch. 14 - A firm has paid dividends of 1.02, 1.10, 1.25, and...Ch. 14 - Prob. 14.3CTFCh. 14 - Why is the tax rate applied to the cost of debt...Ch. 14 - What approach to a projects costs of capital...Ch. 14 - What is the flotation cost of equity for a firm...Ch. 14 - WACC [LO3] On the most basic level, if a firms...Ch. 14 - Book Values versus Market Values [LO3] In...Ch. 14 - Project Risk [LO5] If you can borrow all the money...Ch. 14 - Prob. 4CRCTCh. 14 - DCF Cost of Equity Estimation [LO1] What are the...Ch. 14 - SML Cost of Equity Estimation [LO1] What are the...Ch. 14 - Prob. 7CRCTCh. 14 - Cost of Capital [LO5] Suppose Tom OBedlam,...Ch. 14 - Company Risk versus Project Risk [LO5] Both Dow...Ch. 14 - Divisional Cost of Capital [LO5] Under what...Ch. 14 - Calculating Cost of Equity [LO1] The Absolute Zero...Ch. 14 - Calculating Cost of Equity [LO1] The Graber...Ch. 14 - Calculating Cost of Equity [LO1] Stock in Daenerys...Ch. 14 - Estimating the DCF Growth Rate [LO1] Suppose...Ch. 14 - Prob. 5QPCh. 14 - Calculating Cost of Debt [LO2] Drogo, Inc., is...Ch. 14 - Calculating Cost of Debt [LO2] Jiminys Cricket...Ch. 14 - Prob. 8QPCh. 14 - Calculating WACC [LO3] Mullineaux Corporation has...Ch. 14 - Taxes and WACC [LO3] Lannister Manufacturing has a...Ch. 14 - Finding the Target Capital Structure [LO3] Famas...Ch. 14 - Book Value versus Market Value [LO3] Dinklage...Ch. 14 - Calculating the WACC [LO3] In Problem 12, suppose...Ch. 14 - WACC [LO3] Fyre, Inc., has a target debtequity...Ch. 14 - Prob. 15QPCh. 14 - Prob. 16QPCh. 14 - SML and WACC [LO1] An all-equity firm is...Ch. 14 - Calculating Flotation Costs [LO4] Suppose your...Ch. 14 - Calculating Flotation Costs [LO4] Caughlin Company...Ch. 14 - WACC and NPV [LO3, 5] Scanlin, Inc., is...Ch. 14 - Flotation Costs [LO4] Pardon Me, Inc., recently...Ch. 14 - Calculating the Cost of Debt [LO2] Ying Import has...Ch. 14 - Calculating the Cost of Equity [LO1] Epley...Ch. 14 - Adjusted Cash Flow from Assets [LO3] Ward Corp. is...Ch. 14 - Adjusted Cash Flow from Assets [LO3] In the...Ch. 14 - Prob. 26QPCh. 14 - Prob. 27QPCh. 14 - Flotation Costs and NPV [LO3, 4] Photochronograph...Ch. 14 - Flotation Costs [LO4] Sheaves Corp. has a...Ch. 14 - Project Evaluation [LO3, 4] This is a...Ch. 14 - Prob. 31QPCh. 14 - Prob. 1MCh. 14 - Cost of Capital for Swan Motors You have recently...Ch. 14 - Prob. 3MCh. 14 - Cost of Capital for Swan Motors You have recently...Ch. 14 - Cost of Capital for Swan Motors You have recently...
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Dividend disocunt model (DDM); Author: Edspira;https://www.youtube.com/watch?v=TlH3_iOHX3s;License: Standard YouTube License, CC-BY