# 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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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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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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