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3 November, 15:33

Suppose Potter Ltd. just issued a dividend of $2.50 per share on its common stock. The company paid dividends of $2.00, $2.07, $2.24, and $2.34 per share in the last four years. What was the dividend growth rate for each year? (Do not round intermediate

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  1. 3 November, 16:01
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    Using dividend growth model formula for finding dividend per year can be used to find the growth rate per year;

    The formula would be D1 = D0 (1+g)

    and D2 = D1 (1+g)

    D3 = D2 (1+g) and so on ...

    Starting with 2.00 dividend, growth rate from yr1-yr2;

    2.07 = 2.00 * (1+g)

    Divide both sides by 2.00;

    1+g = 2.07 / 2.00

    1+g = 1.035

    g = 1.035-1

    g (y1-y2) = 0.035 or 3.5%

    Growth rate from yr2-yr3;

    2.24 = 2.07 (1+g)

    Divide both sides by 2.07;

    2.24/2.07 = 1+g

    1.0821 = 1+g

    1.0821-1 = g

    g = 0.0821 or 8.21%

    Therefore, g (y2-y3) = 8.21%

    Growth rate from yr3-yr4;

    2.34 = 2.24 (1+g)

    Divide both sides by 2.24;

    2.34/2.24 = 1+g

    1.0446 = 1+g

    1.0446 - 1 = g

    g = 0.0446 or 4.46%

    Therefore, g (y3-y4) = 4.46%

    Growth rate from yr4-yr5;

    2.50 = 2.34 (1+g)

    2.50/2.34 = 1+g

    1.0684 = 1+g

    1.0684-1 = g

    g=0.0684 or 6.84%

    Therefore, g (y4-y5) = 6.84%
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