Question

Find both the arithmetic growth rate and the geometric growth rate of the dividends for Good Company.

Assuming the January​ 1, 2011 price of the stock is ​$40.00 determine the current required rate of return for the company​ (use the geometric growth rate to calculate the required​ return.)  

Year	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
Dividend	​$1.46	​$1.62	​$2.63	​$2.72	​$2.86	​$2.98	​$2.15	​$2.26	​$2.46	​$2.59

What is the arithmetic growth rate of the dividends for Good Company​?

​ (Round to two decimal​ places.)

What is the geometric growth rate of the dividends for Good Company​?

​ (Round to two decimal​ places.)

What is the required rate of return for Good Company​?

​(Round to two decimal​ places.)

Answer 1

The arithmetic growth rate is the sum of the growth rates divided by 9.

Geometric growth rate = (2.59/ 1.46)^(1/9) - 1

Geometric growth rate = 0.06576331604 = 6.58%

Div1 = 2.59 * (1+0.068) = 2.76612

r = 0.137153 = 13.72%

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