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 %

Homework Answers

Answer #1

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 :)

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