Question

# Suppose Stark Ltd. just issued a dividend of \$2.35 per share on its common stock. The...

 Suppose Stark Ltd. just issued a dividend of \$2.35 per share on its common stock. The company paid dividends of \$1.90, \$2.09, \$2.16, and \$2.27 per share in the last four years.
 If the stock currently sells for \$50, what is your best estimate of the company’s cost of equity capital using the arithmetic average growth rate in dividends? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
 Cost of equity %
 What if you use the geometric average growth rate? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
 Cost of equity %

Growth Rates

 Year Dividend Dividend growth rate 1 1.9 2 2.09 10.00% 3 2.16 3.35% 4 2.27 5.09% 5 2.35 3.52%

Arthimatic mean of growth rate = 10.00+3.35+5.09+3.52 / 4 = 5.49%

Geometric Mean of growth rate = (1.10*1.0335*1.0509*1.0352)(1/4) - 1 = 5.46%

Cost of capital if Arthimatic mean of growth rate is used = D1 / P0 + g = 2.35*1.0549 / 50 + 5.49% = 10.45%

Cost of capital if Geometric mean of growth rate is used = D1 / P0 + g = 2.35*1.0546 / 50 + 5.46% = 10.42%

Thumbs up please if satisfied. Thanks :)