Suppose stark ltd. just issued a dividend of $2.24 per share on its common stock. the company paid dividends of $1.80, $1.98, $2.05, and $2.16 per share in the last four years. a. if the stock currently sells for $45, 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 and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.) a. what if you use the geometric average growth rate? (do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

Ans, The cost of the company’s cost of equity capital using the arithmetic average growth rate is 10.63% and using the geometric average of the growth rate is 10.60%

Explanation:

Hi, this is the equation we need to solve in order to find the company’s cost of equity capital.

As you can see, we almost have everything, the only problem here is "g", its growth rate, so let´s find "g" using the arithmetic average, but first, we need to find the growth rate for every period, the formula is

Therefore, we need to find 4 g´s, let´s call them g1, g2, g3 and g4:

So the average is:

Therefore, the average growth rate is 5.65%

And the company’s cost of equity is:

so, if the average growth rate is found by using the arithmetic average is 10.63%.

Now, let´s find the geometric average

therefore, using the geometric average to find the growth rate, the company’s cost of equity is:

using the geometric average, the company’s cost of equity is 10.60%

Best of luck.

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