Suppose hornsby ltd. just issued a dividend of $2.56 per share on its common stock. the company paid dividends of $2.06, $2.13, $2.30, and $2.40 per share in the last four years. if the stock currently sells for $75, what is your best estimate of the company's cost of equity capital using arithmetic and geometric growth rates?

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Business

Janelle Rasmussen

5 December, 17:24

Suppose hornsby ltd. just issued a dividend of $2.56 per share on its common stock. the company paid dividends of $2.06, $2.13, $2.30, and $2.40 per share in the last four years. if the stock currently sells for $75, what is your best estimate of the company's cost of equity capital using arithmetic and geometric growth rates?

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Jenna Cherry · Answer 1

Divide both sides by the $2.06 which gets you 2.56/2.06 = (1+g) 4

Then you just take the fourth root of both sides and you're left with 1-g on the right. I'm sure you can isolate for g from there on.

Substitute x = 1+g, and solve it like any other equation involving x.

2.56/2.06 = x4

4sqrt (2.56/2.06) = x

x = 1.055828, however, x = 1+g, so g = x-1, g = 1.055828-1 = 0.055828