Page 32 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 2: Time Value of Money

Self Assessment Notes

Fill in the blanks:
10. An annuity that goes on for ever is called a……………... .
11. The present value of a perpetuity of C amount is given by the simple formula: C/i where
i is the……………….. .
12. Many business problems are solved by use of compound interest and ……………….tables.

2.5 Calculation of the Compound Growth Rate

Compound growth rate can be calculated with the following formula:
gr = V (1 + r) = V
n
o n
where,
gr = Growth rate in percentage.
V = Variable for which the growth rate is needed (i.e., sales, revenue, dividend at
o
the end of year '0').
V = Variable value (amount) at the end of year 'n'.
n
n
(1 + r) = Growth rate.
Illustration: From the following dividend data of a company, calculate compound rate of growth
for period (1998-2003).
Year 1998 1999 2000 2001 2002 2003
Dividend per share ( ) 21 22 25 26 28 31

Solution:
5
21 (1 + r) = 31
(1 + r) = 31/21 = 1.476
5

Notes See the compound value one rupee Table for 5 years (total years – one year) till you
find the closest value to the compound factor, after finding the closest value, see first
above it to get the growth rate.

Task Determine the rate of growth of the following stream of dividends a person has
received from a company:
Year Dividend (per share)( )
1 2.50
2 2.60

3 2.74
4 2.88
5 3.04

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