Problem:
Suppose Powers Ltd. just issued a dividend of $2.59 per share on its common stock. The company paid dividends of $2.09, $2.16, $2.33, and $2.43 per share in the last four years.
Required:
Question: If the stock currently sells for $78, what is your best estimate of the company's cost of equity capital using arithmetic and geometric growth rates?
Note: Provide support for your underlying principle.