Question

Justin Owens is an analyst for an equity mutual fund that invests in British stocks. At the beginning of 2008, Owens is examining domestic stocks for possible inclusion in the fund. One of the stocks that he is analyzing is British Sky Broadcasting Group (London Stock Exchange: BSY). The stock has paid dividends per share of £9, £12.20, and £15.50 at the end of 2005, 2006, and 2007, respectively. The consensus forecast by analysts is that the stock will pay a dividend per share of £18.66 at the end of 2008 (based on 19 analysts) and £20.20 at the end of 2009 (based on 17 analysts). Owens has estimated that the required rate of return on the stock is 11 percent.Question: The compound annual growth rate in dividends from 2005 to 2007 inclu­sive (i.e., from a beginning level of £9 to an ending level of £15.50) and the con­sensus predicted compound annual growth rate in dividends from 2007 to 2009, inclusive are:Select one:A. 28.2% and 11.2%B. 29.2% and 12.2%C. 30.2% and 13.2%D. 3

Answer 1

The calculated compound annual growth rate (CAGR) for dividends from 2005 to 2007 is 20.2%, and the predicted CAGR from 2007 to 2009 is 14.1%. However, the options provided in the question do not match these calculations, indicating a discrepancy in the question or options.

Step-by-step explanation:

The student has asked to calculate the compound annual growth rate (CAGR) of dividends for British Sky Broadcasting Group (BSY) from 2005 to 2007 and the predicted CAGR from 2007 to 2009. To find the CAGR for the period 2005 to 2007, we use the formula CAGR = (Ending Value/Beginning Value)^(1/Number of Years) - 1. For the first period (2005-2007), the CAGR is calculated as (($15.50 / $9)^(1/3))-1, which equals approximately 0.202 or 20.2%. For the predicted period (2007-2009), the calculation is (($20.20 / $15.50)^(1/2))-1, which results in approximately 0.141 or 14.1%.

However, in the question, the closest options provided are 28.2% and 11.2%, 29.2% and 12.2%, or 30.2% and 13.2%. Since none of these options match the calculated CAGRs, it seems there is a discrepancy or possible error in the question or the options provided.

Answer 2

CAGR = 17.55%

Step-by-step explanation:

compound annual growth rate (CAGR) = (ending value / beginning value)¹/ⁿ - 1

beginning value = £9

ending value = £20.20

n = 5

CAGR = (£20.20 / £9)¹/⁵ - 1 = 1.1755 - 1 = 0.1755 = 17.55%

we can check that our answer is right by calculating the future value of £9 using the CAGR = £9 x (1 + 0.1755)⁵ = £20.20 ✓