Hanna Inc. has a proprietary bond-rating model and has determined the required return on the following Amerco bond is 7.5%. Assu
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Answer:
Ans, The cost of the company’s cost of equity capital using the arithmetic average growth rate is 10.63% and using the geometric average of the growth rate is 10.60%
Explanation:
Hi, this is the equation we need to solve in order to find the company’s cost of equity capital.
As you can see, we almost have everything, the only problem here is "g", its growth rate, so let´s find "g" using the arithmetic average, but first, we need to find the growth rate for every period, the formula is
Therefore, we need to find 4 g´s, let´s call them g1, g2, g3 and g4:
So the average is:
Therefore, the average growth rate is 5.65%
And the company’s cost of equity is:
so, if the average growth rate is found by using the arithmetic average is 10.63%.
Now, let´s find the geometric average
therefore, using the geometric average to find the growth rate, the company’s cost of equity is:
using the geometric average, the company’s cost of equity is 10.60%
Best of luck.