Suppose Stark Ltd. just issued a dividend of $2.57 per share on its common stock. The company paid dividends of $2.10, $2.31, $2.38, and $2.49 per share in the last four years. If the stock currently sells for $60. Required:
a. What is your best estimate of the company's cost of equity capital using the arithmetic average growth rate in dividends?
b. What if you use the geometric average growth rate? (Do not round intermediate calculations.

arithmetic average growth rate = (10% + 3.03% + 4.62% + 3.21%) / 4 = 5.22%

we need to find the required rate or return (RRR) in the following formula:

stock price = expected dividend / (RRR - growth rate)

605 = 2.7042 / (RRR - 0.0522)

RRR - 0.0522 = 2.7042 / 60 = 0.045

RRR = 0.045 + 0.0522 = 0.0973 = 9.73%

geometric average growth rate = [(1.10 x 1.0303 x 1.0462 x 1.0321)¹/⁴] - 1 = 0.05178 = 5.18%

again we need to find the required rate or return (RRR) in the following formula:

stock price = expected dividend / (RRR - growth rate)

60 = 2.703126 / (RRR - 0.0518)

RRR - 0.0518 = 2.703126 / 60 = 0.0450521

RRR = 0.0968521 = 9.69%

the third answer is correct.

answer; intellectual property protection;