Suppose Stark Ltd. just issued a dividend of $2.57 per share on its common stock. The company paid dividends of $2.20, $2.31, $2.38, and $2.49 per share in the last four years. If the stock currently sells for $65, 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.)

Question

Business

Jaylah Strickland

2 December, 15:47

Suppose Stark Ltd. just issued a dividend of $2.57 per share on its common stock. The company paid dividends of $2.20, $2.31, $2.38, and $2.49 per share in the last four years. If the stock currently sells for $65, 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.)

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Answers (1)

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Janae Perry · Answer 1

Growth rate (g) = n-1√ (Latest dividend) - 1

Current dividend

= 4-1√ ($2.49/2.20) - 1

= 3√ (1.1318) - 1

= 1.04 - 1

= 0.04 = 4%

Ke = Do (1 + g) + g

Po

Ke = $2.57 (1 + 0.04) + 0.04

65

Ke = 0.04 + 0.04

Ke = 0.08 = 8%

Explanation:

In this case, we need to calculate the growth rate using the above formula. Then, the cost of equity will be calculated. Cost of equity is a function of current dividend paid subject to growth rate divided by current market price.