Question

1 - Your company paid a dividend of $1. Three years later, the current dividend is $1.20. What was the growth rate of the dividend?

2 - Over the past year, a stock had a beta of 1.65. The stock market will be going down 3% next month. What percentage can you expect to do based on the beta?

Answer 1

Answer-

Q 1)

Dividend paid = $ 1
Dividend after 3 years = $ 1.20

Growth rate of dividend = ($ 1.20 - $ 1) / $ 1
= $ 0.20 / $ 1.0
= 0.20
= 20 %

Growth rate for 3 years = 20 %

If we calculate Compounded annual growth rate ( CAGR )
= (Ending value / Starting value )1/n  - 1 [ n = Number of years = 3 years ]
= ( $ 1.20 / $ 1.0)(1/3)  - 1
= ( 1.2 )0.333 - 1
= 1.0626 - 1
= 0.0626
= 6.26 %

The growth rate ( CAGR ) of dividend = 6.26 % / year

Q 2)

Given

Beta = 1.65
The stock market will be going down by 3 % next month
The expected based on Beta is

We know by CAPM that

Expected return = Risk free rate + Beta x ( Market rate - Risk free rate)
In the above equation the risk free rate is same and market rate is going down by 3 %

Therefore

Expected return = Risk free rate + 1.65 x ( - 3 % ) = Risk free rate + 1.65 x ( - 3 %)
Therefore the Expected return next month = Risk free rate - 4.95 %

The expected return of stock market will decrease by 4.95 % next month based on Beta of 1.65

The stock market return next month = - 4.95 %