Question

17. 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?
A. 4.80 percent
B. 5.79 percent

C. 5.88 percent D. 6.04 percent E. 6.33 percent

18. Roy's Markets has net income of $164,000. The firm has 200,000 shares of common stock outstanding. The dividend for this year is $0.61 per share. What is the retention ratio?
A. 0.220
B. 0.256

C. 0.314 D. 0.774 E. 0.780

Answer 1

17 Geometric mean takes several values and multiplies them together and sets them to the 1/nth power.

Geometric mean = ( x1,x2,x3....xn)^1/n

where x are the values , n is the no of values.

Geometric average dividend growth rate

= (Dividend of year 1 * dividend of year 2 * dividend of year 3 * dividend of year 4 * dividend of year 5) ^ 1/5

= (1.40 * 1.55 * 1.70 * 1.73 * 1.77)^0.20

=1.6240 - 1

= 62.40%

18. Retention ratio states the portion of the income retained by the company set aside for the growth activities

Retention ratio = (Earning Per share - Dividend per share ) / Earning per share

Earning per share is the earning earned by each shareholder on one share

EPS = Net income / no of shares

= 164000/200000

= $0.82

Retention ratio = (0.82 - 0.61 )/0.82

= 0.21 / 0.82 = 0.256