Question

Year	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
Dividend	$         7.46	$         7.91	$         8.38	$         8.80	$         9.24	$         9.70	$       10.28	$       10.79	$       11.33	$       12.01

Find both the arithmetic growth rate and the geometric growth rate of the dividends for Davy's Crock Pot Stores. Assuming the January​ 1, 2011 price of the stock is $110.00​, determine the current required rate of return for the company​ (use the geometric growth rate to calculate the required​ return.)

What is the arithmetic growth rate of the dividends for Davy's Crock Pot Stores​? (Round to two decimal​ places.)

What is the geometric growth rate of the dividends for Davy's Crock Pot Stores​? Round to two decimal​ places.)

What is the required rate of return for Davy's Crock Pot Stores​? Round to two decimal​ places.)

Answer 1

Solution :-

(a) Airthermatic Growth Rate = 48.91% / 9 = 5.43%

(b) Geometric Growth Rate = ( 1 + 0.4891 )^1/9 - 1 = 1.0452 - 1 = 0.0452 = 4.52%

(c) Price of Stock = $110

Dividend last Paid = $12.01

Next Year Dividend = $12.01 * ( 1 + 0.0452 ) = $12.55

Ke = [ D1 / Po ] + g   

Ke = [ $12.55 / $110 ] + 0.0452

Ke = 0.1593 = 15.93%

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