Suppose Stark Ltd. just issued a dividend of $1.91 per share on its common stock

Question

Suppose Stark Ltd. just issued a dividend of $1.91 per share on its common stock. The company paid dividends of $1.60, $1.66, $1.73, and $1.84 per share in the last four years.

If the stock currently sells for $45, what is your best estimate of the company’s cost of equity capital using the arithmetic average growth rate in dividends?

Suppose Stark Ltd. just issued a dividend of $1.91 per share on its common stock. The company paid dividends of $1.60, $1.66, $1.73, and $1.84 per share in the last four years.

Explanation / Answer

Ans-

Price of stick (P) $45

D=Current dividend

Cost of equty(Ke) ?

Ke={(D+g)/P}+g

={(1.91*1.04)/45}+0.04

=0.044+0.04

=0.084

=8.4%

Year Dividend Growth % of Growth 1 1.6 0 0 2 1.66 0.06 4 3 1.73 0.07 4 4 1.84 0.11 6 5 1.91 0.07 4 Total 18 Average 4%

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