Page 313 - FM Integrated WorkBook STUDENT 2018-19

The cost of capital

2.3 Estimating growth

Past dividends:

D 0 1/n
g = –––– – 1
D n

D n = dividend n years ago

n = number of years of growth

Earnings retention model (Gordon’s growth model):

g = br e

b = earnings retention rate

r e = accounting rate of return

Question 6

Estimating growth using past dividends

A company’s dividend just paid was $0.63 per share. 6 years ago the dividend
was $0.50 per share.

Estimate the annual growth rate in dividends.

1/n
g = (D 0/D n) – 1
1/6
g = ($0.63/$0.50) – 1
g = 0.039 or 3.9%

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