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Que –
UUL Co is a public water supply company which was privatised a number of years ago. As
the deputy Finance Director you are reviewing the draft financial statements which contain
the following statement by the chairman:
‘This company has delivered above average performance in fulfilment of our objective of
maximising shareholder wealth. Earnings, dividends and the share price have all shown
good growth. It is our intention to continue to deliver strong performance in the future’.
The following information has been extracted from the draft financial statements:
Year 20X6 20X2
Dividend per share 7.1c 4.2c
Earnings per share 41.3c 31.6c
Price/earnings ratio 22.0 17.0
You have obtained the following information regarding the water industry for the last
5 years:
Dividend growth 11% annually
Earnings growth 12% annually
Share price growth 18% annually
General inflation in the economy has averaged 2% per annum.
The number of shares in issue has remained unchanged over the last 5 years and the
price/earnings ratios are calculated using year end share prices.Calculate the equivalent annual growth in:
(i) Dividends per share
(ii) Earnings per share
(iii) Share priceso why have they taken 7.1/4.2 )^0.25 -1
how did 0.25 came here ? shouldnt it be 4 as it is changing over 4 years.?
Between 20X2 and 20X6 there are 4 years of growth.
The growth in dividends over the 4 years is 7.1/4.2
The average annual growth is therefore (the fourth root of 7.1/4.2) – 1 = 0.14 or 14%
You should have learned at school that taking something to the power of 1/4 (i.e. 0.25) is the same as taking the fourth root. You can write it either way but in printed books it is easier and more common to type it as ‘to the power of 0.25’.
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