Question

The growth rate is 5.41% (EAR). We are calculating the stock value for 2 years worth...

The growth rate is 5.41% (EAR). We are calculating the stock value for 2 years worth of dividends that are paid monthly. What is the periodic rate we should use in our calculation? Round your answer to 2 decimal places AND enter your final answer as a percentage. Do not include "%" in your answer. For example 0.652124 = 65.21

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Answer #1

Effective annual rate = (1+r/n)n - 1

where r is the nominal rate per year, n is the number of periods of compounding per year

We have Effective annual rate and we have to find out the nominal growth rate per year.

Given EAR = 5.41%, the effective rate is based on monthly compounding.

5.41% = (1+r/n)12 - 1

0.0541 + 1 = (1+r/12)12

(1.0541)1/12 = 1+r/12

1.0044003 = 1+r/12

r/12 = 0.0044003

r => 0.528036

The growth rate(periodic rate) per year is 5.28%.

Note : Effective annual rate is based on compounding periods in a single year. So, it doesnt matter if we are calculating the stock value of 2 years or more. Nominal rate and effective rate are always calculated based on a single year timeframe.

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