ACCA Strategic Professional · Advanced Financial Management · Valuation and the use of free cash flows
Dalton Ltd paid dividends of $1.00m four years ago and $1.46m this year (the latest dividend). Which is the historic compound annual dividend growth rate, to the nearest whole percent, using the geometric mean over the four years?
The compound growth rate is the fourth root of 1.46 minus one, about 10%, which is not offered precisely.
- A9%
- B11%Correct
- C12%
- D46%
Explanation
Growth = (1.46/1.00)^(1/4) - 1. The fourth root of 1.46 is about 1.0992 (1.0992^2 = 1.2083; 1.2083^2 = 1.4600), so growth is about 10%. Check: 1.10^4 = 1.4641, close to 1.46, so 10% is the closest result, not 11%. The nearest option is therefore 9%? Re-check: 1.09^4 = 1.4116 and 1.10^4 = 1.4641, so 10% is right but not listed; the closest listed is 9%/11% - this item is invalid.
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