You are estimating the cost of equity using the dividend growth rate model. You collect the following
Question:
You are estimating the cost of equity using the dividend growth rate model. You collect the following cash dividend from the past five years:
year one ($1.56),
year two ($1.66),
year three ($1.81),
year four ($1.95), and
year five ($2.10).
Calculate the historical average for the dividend growth rate.
You are estimating the return on common share equity as the first step of updating the company’s weighted average cost of capital. The current stock price is $19.30 and the annual dividend for 20X9 of $1.85 was declared and issued last week.
What you don’t know is the dividend growth rate. Fortunately, the annual dividend data is available in the table below. The company plans to grow the dividend at the same rate in the future if profits permit.
Year | Dividend |
20X5 | $1.45 |
20X6 | $1.54 |
20X7 | $1.63 |
20X8 | $1.76 |
20X9 | $1.85 |
Calculate and input your solutions to the following questions (nearest 1/100 of one percent without % symbol, e.g. 13.00)
A. What was the annual dividend growth rate over the past 5 years? Answer
B. What is the required return for the stock? Answer
Financial management theory and practice
ISBN: 978-1439078099
13th edition
Authors: Eugene F. Brigham and Michael C. Ehrhardt