Suppose Powers Ltd. just issued a dividend of S1.20 per share on its common stoc

Question

Suppose Powers Ltd. just issued a dividend of S1.20 per share on its common stock. The company paid dividends of $.85. $.92. $.99. and $1.09 per share in the last four years. 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).) Arithmetic dividend growth rate Geometric dividend growth rate

Explanation / Answer

Arithmetic rate = {(.92/.85 - 1) + (.99/.92 - 1) + (1.09/0.99 - 1)}/3 = 8.65%

Geometric rate = {(0.92/.85)*(.99/.92)*(1.09/0.99)}1/3 - 1 = 8.64%

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