Calculate the firm’s expected rate of return using your calculated expected dividend, growth rate, and the unadjusted price for April 30 of this year.

Constant-Growth Dividend Discount Model

You will be marked based on the following categories (equal weighting for each): Data (inclusion and accuracy), Sources (provided and clear), Calculations (properly done), Documentation (formulas and sample calculations provided for the calculations), and Presentation

For this section, you will use the constant-growth dividend discount model to estimate your company’s expected rate of return. You will assume that the company is attempting to achieve a constant growth rate with its dividends and calculate that growth rate. The growth rate plus the expected dividend yield will give the expected rate of return.

Historical Growth:

   Data Required:

  • Quarterly dividends per share paid by your company (in Canadian Dollars) for the period May 1, 2017 to April 30, 2022.  Use the ex-dividend date (2 business days before the record date) as the date of the dividend.  The date provided by Yahoo Finance is the ex-dividend date.
    • A good source is the company’s website although the reported dividends may not have been adjusted for splits, so you will have to make the adjustment.
    • Another good source is Yahoo Finance Canada (https://ca.finance.yahoo.com/) but it sometimes misses dividends, double lists dividends, or records them incorrectly, so it is best to verify by checking the company’s website.
    • Only the regular quarterly dividends should be included.  Do not include any extra or special dividends.
  • The April 30, 2022 closing stock price for your company.
    • This can be found on Yahoo Finance Canada (https://ca.finance.yahoo.com/), the Toronto Stock Exchange (https://www.tsx.com), or many other financial websites

   Calculations:

  1. Calculate the annual dividends that your company paid. Sum the four quarterly dividends paid between May of one year and April of the next year for each of the 5 years of data you have collected.
    1. In some cases the company may have changed its dividend payment dates so that you may get a year with 5 dividends and/or a year with 3 dividends. You may need to make an adjustment so that you are always working with 4 dividends (i.e., move April up to May, or May back to April).
    2. Some companies may have paid extra dividends. This will appear either as an added dividend payment or as an extra-large dividend that has been lumped with the regular dividend. If it looks like this has happened with your company you will need to check the appropriate annual report to determine if it was an extra or special dividend, in which case you should not include it in your calculations (but do still show it in your data and make a note that it was an extra dividend).
    3. Make sure your data have been adjusted for splits. If you see the dividends have suddenly dropped by a large amount, it is likely that there has been a split and you will need to make an adjustment (for example, if there was a 2-for-1 split, you will need to divide all the dividends prior to the split by 2).
  2. Calculate the annual growth rates of the dividends (i.e., the percentage change in annual dividends from one year to the next).
  3. Calculate the average of your 4 annual growth rates. This is your value for g.
  4. Estimate the total dividends that will be paid between May of this year and April of next year, assuming that the firm maintains its current average annual growth rate.
  5. Calculate the firm’s expected rate of return using your calculated expected dividend, growth rate, and the unadjusted price for April 30 of this year.