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stira [4]
4 years ago
5

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.
Business
1 answer:
DerKrebs [107]4 years ago
3 0

Answer:

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)

  • expected dividend = $2.57 x 1.0522 = $2.7042
  • stock price = $60
  • growth rate = 0.0522

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)

  • expected dividend = $2.57 x 1.0518 = $2.703126
  • stock price = $60
  • growth rate = 0.0518

60 = 2.703126 / (RRR - 0.0518)

RRR - 0.0518 = 2.703126 / 60 = 0.0450521

RRR = 0.0968521 = 9.69%

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7 0
1 year ago
According to Modigliani and Miller (MM), in a world with corporate income taxes, the optimal capital structure calls for approxi
Strike441 [17]

Answer:

True

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The term "equity carve-out" refers to the situation where a firm's managers give themselves the right to purchase new stock at a
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b. False

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3 years ago
Characteristics of just-in-time partnerships do not include:
julia-pushkina [17]
<span>Characteristics of just-in-time partnerships do not include:
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The answer is B</span>
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