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The cost of ccapital

2.3 Esstimating growth

Past dividends:

D 0 1/nn
g = –––– – 1
D n

D n == dividend n years aggo

n = number off years of ggrowth

Earnings retenntion modeel (Gordon’s growth mmodel):

g = br e

b = earnings rretention raate

r e = accounting rate of reeturn

Quuestionn 6

Estimating grrowth usinng past divvidends

A coompany’s ddividend jusst paid wass $0.63 peer share. 66 years agoo the divideend
was $0.50 per share.

Estimmate the aannual growwth rate in dividends.

1/n
g = ((D 0/D n) –– 1
1/6
g = (($0.63/$0.550) – 1
g = 00.039 or 3..9%

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