Question 2.S2.13: Mr X wishes to determine the rate of growth of the following......
Mr X wishes to determine the rate of growth of the following stream of dividends he has received from a company:
Growth has been experienced for four years. In order to determine this rate of growth, the amount of dividend received in year 5 has been divided by the amount of dividend received in the first year. This gives us a compound factor which is 1.216 (Rs 3.04 \div Rs 2.50 ). Now, we have to look at Table A-1 which gives the compounded values of Re 1 at various rates of interest (for our purpose the growth rate) and number of years. We have to look to the compound factor 1.216 against fourth year in the row side. Looking across year 4 of Table A-1 shows that the factor for 5 per cent is exactly 1.216; therefore, the rate of growth associated with the dividend stream is 5 per cent.
4. To determine the current values of debentures, the present value Tables A-3 and A-4 can be of immense use. The cash flow from a debenture consists of two parts: first, interest inflows at periodic intervals, say, semi-annually or annually and, second, the repayment of the principal on maturity. Since the interest payments on a debenture are made periodically throughout its life, it is easy to calculate the present value of this annuity type interest inflow by consulting Table A- 4 and the present value of the face value of the debentures can be ascertained by discounting it at the market rate of interest by consulting Table A-3. The sum of the two values so obtained will be current worth of a debenture. If the interest is paid after six months, the factors are obtained for one-half of the discount rate and the number of years is doubled. Consider Example 2.14.