Problem
Suppose In a Found Ltd. just issued a dividend of $2.15 per share on its common stock. The company paid dividends of $1.75, $1.89, $1.96, and $2.07 per share in the last four years.
Task:
Question 1: If the stock currently sells for $40, 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: Explain all calculation and formulas.