Question

Over the past 5 years, DL Insulation has paid annual dividends of $1.40, $1.55, $1.70, $1.73, and $1.77 per share. What is the geometric average dividend growth rate for this period?

Answer 1

Answer:

The average dividend growth rate is 6.04%

Explanation:

Given;

annual dividends = $1.40, $1.55, $1.70, $1.73, $1.77

Using the growth divided formula given as;

Gi = (Di / Di-1) – 1 * 100

where Gi is the average dividend

       Di is the initial dividend

  Substituting, we have

G1 = (1.55/1.4) - 1 *100 =10.71%

G2 = (1.70/1.55)-1 * 100 = 9.68%

G3 = (1.73/1.70 -1 *100 = 1.76%

G4 = (1.77/1.73) -1 * 100 = 2.31

Average growth rate = (G1 +G2 + G3 + G4)/4

                                   = 6.1%

For a compounded growth rate, we use the formula

Dividend Growth Rate Formula = [(Df / Di)¹/ⁿ – 1] * 100%

where Df is the final dividend and Di is the initial dividend

Substituting, we have

Compounded growth rate = [(1.77 / 1.40)¹/⁴  – 1] * 100%

                                             =( 1.264¹/⁴ - 1) * 100

                                              =1.06038 - 1 * 100

                                              =0.06038 * 100

                                             = 6.04%