Question

Let's say a company pays a quarterly dividend. You just collected a $1 dividend today. Over the next five years, you expect the quarterly dividend to growth to the following amounts as of the end of each annual anniversary:

After 1 year, $1.1

After 2 years, $1.15

After 3 years , $1.25

After 4 years, $1.30

After 5 years, $1.45

Assuming annual compounding, what is the compounded annual growth rate of the dividend?

Question 10 options:

	A) 7.7%
	B) 9.1%
	C) 6.7%
	D) 8.7%
	E) 9%

Installation costs are sunk costs that are not to be included as relevant in any capital budgeting decision.

options:

	True
	False

Answer 1

First Question

The Correct Answer would be Option A - 7.7%

For the first problem we will use the formula of Compounded Annual Growth Rate (CAGR)

(Ending Value / Begining Value)^{1/Number of years} - 1

Here Begining Value = $1

Ending Value = $1.45

Number of Years = 5

Therefore

CAGR = (1.45 / 1)^1/5 - 1

= 1.077143587792743 - 1

0.077143588 or

7.7% (rounded off )

Second Question

The Correct Answer would be True

Sunk costs are those costs which once they are incurred cannot be recovered. Since they cannot be regained they should not be considered in any decision making relating to Capital Budgeting.

Installation costs are also Sunk Costs which are incurred when we purchase a machinery and make it ready for use. As installation cost is a one time expense incurred and cannot be recovered. Installation cost will have no bearing in the outcome of a project.

Thus it will be irrelevant in Decision making relating to Capital Budgeting.