Suppose Powers Ltd. just issued a dividend of $2.47 per share on its common stoc

Question

Suppose Powers Ltd. just issued a dividend of $2.47 per share on its common stock. The company paid dividends of $1.97, $2.04, $2.21, and $2.31 per share in the last four years.

What was the dividend growth rate for each year? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)

What were the arithmetic and geometric dividend growth rates over the past four years? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)

If the stock currently sells for $66, 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).)

Suppose Powers Ltd. just issued a dividend of $2.47 per share on its common stock. The company paid dividends of $1.97, $2.04, $2.21, and $2.31 per share in the last four years.

Explanation / Answer

The dividend growth rate for each year

$1.97, $2.04, $2.21, and $2.31 per share in the last four years and current year = 2.47

Year 1 growth rate = (2.04 - 1.97 ) / 1.97 * 100 = 3.55 %

Year 2 growth rate = (2.21 - 2.04 ) / 2.04 * 100 = 8.33 %

Year 3 growth rate = (2.31 - 2.21 ) / 2.21 * 100 = 4.52 %

Year 4 growth rate = (2.47 - 2.31 ) / 2.31 * 100 = 6.93 %

Arithmetic dividend growth rate = Total growth over n number of year / n

= 3.55 + 8.33 + 4.52+ 6.93 / 4 = 5.8325 %

Geometric dividend growth rate = (3.55*8.33*4.52*6.93)^4 = 5.52 %

Cost of equity using  Arithmetic dividend growth rate = D1 / p0 + g

= 2.47 /66 + 0.058325

=9.57 %

Cost of equity using Geometic dividend growth rate = D1 / p0 + g

= 2.47 /66 + 0.0552

=9.26 %

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