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Year 20X6 20X2
Dividend per share 7.1c 4.2c
Earnings per share 41.3c 31.6c
Price/Earning ratio 22.0 17.0You have obtained the following information regarding the 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% p.a
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 pricesa) Calculate the equivalent annual growth in
i) Dividends per share
ii) Earnings per share
iii) Share priceCan you please help me how to calculate equivalent annual growth , the answer in kit is current year/previous year power 0.25 minus 1 is it specific formula or did they calculate 0.25 using any information?
Thanks
From 20X2 to 20X6 there are 4 years of growth (X2 to X3; X3 to X4; X4 to X5; and, X5 to X6)
Therefore, if the rate of growth is g per year, then for dividends 4.2 x (1+g)^4 = 7.1
Therefore (1+g)^4 = 7.1/4.2
Therefore 1+ g = 4th root of (7.1/4.2)
Therefore g = 4th root of (7.1/4.2) – 1
( (7.1/4.2)^0.25 is a way of typing 4th root of (7.1/4.2), because 1/4 = 0.25)
All of this is explained in my free lectures. The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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