ACCA Financial Management (F9) Certification Practice Exam

What is the formula for estimating future dividend growth?

1. 1 + g = (latest dividend / earliest dividend)^n

2. g = (earliest dividend / latest dividend) - 1

3. g = RC * (1 + latest dividend)

4. (1 + n) = latest dividend / earliest dividend

The correct answer is: 1 + g = (latest dividend / earliest dividend)^n

The formula for estimating future dividend growth focuses on understanding how dividends change over a period and is often expressed in terms of growth rates. The correct approach reflects the fundamental concept of the compound growth rate of dividends over a specified time frame. The correct answer correctly identifies the relationship between the initial and the final dividends over a defined period. It sets up the notion that the growth factor (1 + g) is related to the ratio of the latest dividend to the earliest dividend raised to the power of n, which represents the number of periods (usually years) between the two dividends. This formula essentially captures the compound growth rate of dividends, recognizing that dividends have typically grown at a consistent rate over time. In contrast, the other options either misrepresent the growth calculation or do not correctly articulate the relationship between dividend amounts and their growth over time: - The second option inaccurately sets up the formula, suggesting that growth can be calculated directly from dividing the earliest dividend by the latest dividend, which is incorrect as it inverts the proper order and does not account for the compounding effect. - The third option introduces a variable (RC) that does not appropriately apply to the standard dividend growth formula and adds unnecessary complexity that is not rooted in the established theory of dividend growth