Problem: Suppose In a Found Ltd. just issued a dividend of $1.92 per share on its common stock. The company paid dividends of $1.50, $1.65, $1.72, and $1.83 per share in the last four years.
Required:
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 the solution in detail.