The Oxford Heating Company has been very successful in the past four years. Over these years, it paid common stock dividend of $4 in the first year, $4.20 in the second year, $4.41 in the third year, and its most recent dividend was $4.63. The company wishes to continue this dividend growth indefinitely. The expected growth rate in dividends is closest to

Question

Princess

Business

17 April, 18:18

The Oxford Heating Company has been very successful in the past four years. Over these years, it paid common stock dividend of $4 in the first year, $4.20 in the second year, $4.41 in the third year, and its most recent dividend was $4.63. The company wishes to continue this dividend growth indefinitely. The expected growth rate in dividends is closest to

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Answers (1)

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Sarahi Pratt · Answer 1

The correct answer is 5%.

Explanation:

According to the scenario, the computation of the given data are as follows:

We can calculate the growth rate by using following formula:

Growth rate = (Dividend of 3rd year : Dividend of 1st year) ^1/2 - 1

By putting the value in the formula, we get

Growth rate = ($4.41 : $4) ^1/2 - 1

= ($0.41) ^1/2 - 1

= 0.05 or 5%