Problem:
Suppose In a Found Ltd. just issued a dividend of $2.33 per share on its common stock. The company paid dividends of $2.00, $2.08, $2.15, and $2.26 per share in the last four years.
Required:
Question 1: If the stock currently sells for $55, what is your best estimate of the company's cost of equity capital using the arithmetic average growth rate in dividends?
Question 2: What if you use the geometric average growth rate?
Note: Please provide through step by step calculations.