Suppose Powers Ltd. just issued a dividend of $2.63 per share on its common stoc

Question

Suppose Powers Ltd. just issued a dividend of $2.63 per share on its common stock. The company paid dividends of $2.13, $2.20, $2.37, and $2.47 per share in the last four years.

If the stock currently sells for $82, 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).)

Required:

If the stock currently sells for $82, 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).)

Explanation / Answer

Therefore cost of equity can be find out using the dividend discount model also known as gordans model

ke = Do/P0 +growth rate

Ke= 2.63/82+.0434

Therefore Ke= 7.55%

year 1 2 3 4 Now Dividend 2.13 2.2 2.37 2.47 2.63 Growth each year 3.29% 7.73% 4.22% 6.48% Therefore Arithmetic growth rate 4.34% Geometric mean (3.29*7.73*4.22*6.48)^(1/4) Geometric mean in percentage 5.14

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