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Author Question: Why would we want to assume a constant growth to dividends if we seldom see a firm with this type of ... (Read 23 times)

Themember4

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on: Jul 10, 2018
Why would we want to assume a constant growth to dividends if we seldom see a firm with this type of pattern?
 
  A) The answer is that we really want to estimate a series of future dividends and can only do this if we have a growth rate.
  B) The answer is that we do not need to estimate future capital gains and can only do this if we have a growth rate.
  C) The answer is that we really want to estimate a series of past dividends and can only do this if we have a growth rate.
  D) The answer is that we really want to estimate the past capital gains and can only do this if we have a growth rate.

Question 2

In a stream of past dividends, the initial dividend is 1.25 and the most recent dividend is 1.80. The number of years between these two dividends (n) is 7 years. What is the average growth rate during this seven-year period?
 
  Use a calculator to determine your answer.
  A) 4.35
  B) 5.35
  C) 6.35
  D) 7.35


blfontai

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Reply #1 on: Jul 10, 2018
Answer to Question 1

Answer: A
Explanation: A) The answer is that we really want to estimate a series of future dividendsnot just the very next dividendand the constant growth pattern allows a simple extrapolation of the future dividend stream from the most recent dividend stream.

Answer to Question 2

Answer: B
Explanation: B) With N = 7, PV = -1.25, FV = 1.80, and PMT = 0, we get I/Y = 5.3473, or about 5.35.


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