Suppose Powers Ltd. just issued a dividend of $1.20 per share on its common stock. The company paid dividends of $.85, $.92, $.99, and $1.09 per share in the last four years. 
Required: 
If the stock currently sells for $53, what is your best estimate of the company’s cost of equity capital using arithmetic and geometric growth rates? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).) 
Cost of equity  
Arithmetic dividend growth rate  % 
Geometric dividend growth rate  % 
Cost of equity 

Arithmetic dividend growth rate 
11.48% 
Geometric dividend growth rate 
11.47% 
Explanation;
1. Cost of equity (Arithmetic dividend growth rate);
First of all let’s calculate growth rate;
g1 = ($.92 – $.85) / $.85 = 8.24%
g2 = ($.99 – $.92) / $.92 = 7.61%
g3 = ($1.09 – $.99) / $.99 = 10.10%
g4 = ($1.20 – $1.09) / $1.09 = 10.09%
Average arithmetic growth rate will be (8.24 + 7.61 + 10.10 + 10.09) / 4 = 9.01%
Now let’s calculate cost of equity;
Cost of equity [$1.20 (1.0901) / $53] + 0.0901
Cost of equity = 11.48%
2. Cost of equity (Geometric growth rate);
First of all let’s calculate growth rate;
$1.20 = $.85(1 + g)4
On solving this equation growth rate comes to .0900
Thus, growth rate (g) = 9%
Now let’s calculate cost of capital;
Cost of equity;
Cost of equity [$1.20 (1.09) / $53] + 0.09
Cost of equity = 11.47%
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