Question

Suppose Stark, Ltd., just issued a dividend of $2.40 per share on its common stock. The company paid dividends of $1.21, $1.77, $2.05, and $2.22 per share in the last four years. If the stock currently sells for $47, what is your best estimate of the company’s cost of equity capital using the arithmetic average growth rate in dividends?

Select one:

A. 19.63%

B. 15.41%

C. 17.48%

D. 16.36%

E. 17.70%

Answer 1

Computation of Cost of Equity

Year	Dividend	Growth rate
1	1.21	.............
2	1.77	1.77-1.21/1.21*100=46.28%
3	2.05	2.05-1.77/1.77*100= 15.81%
4	2.22	2.22-2.05/2.05*100= 8.29%
5	2.40	2.40-2.22/2.22*100= 8.11%
Total		= 78.5

Arithmetic Average Growth Rate:Summation of Growth/No of Growth rate

= 78.5/4= 19.63%

Caculation of Cost of Equity:

Cost of Equity Capital =  

R= Dividend/ price+Growth

2.40/47+0.1963

0.247*100= 24.73%

Conclusion: So from above we calculated Growth rate that is 19.63% and cost of equity is 24.73%