Question
Asked Apr 28, 2019
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Suppose Hornsby Ltd. just issued a dividend of $2.55 per share on its common stock. The company paid dividends of $2.05, $2.12, $2.29, and $2.39 per share in the last four years.
 
If the stock currently sells for $74, what is your best estimate of the company’s cost of equity capital using arithmetic and geometric growth rates?

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Expert Answer

Step 1

Calculating the value of cost of equity capital using arithmetic growth rates. We have,

(a) Arithmetic growth rate = (Latest dividend – First Dividend) / 4 / First Dividend x 100

Arithmetic growth rate = ($2.55 - $2.05) / 4 / $2.05*100

Arithmetic growth rate = 6.0976 %

(b) Expected dividend = Latest Dividend (1+ Ar...

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