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The Dividend Discount Model (DDM) is a fundamental method used to estimate the present value of a company’s stock. It does this by predicting the future dividends and discounting them back to their present value. This model is based on the theory that the intrinsic value of a stock is the sum of all its future dividend payments when discounted back to their present value. The core formula used in DDM is:\[Cost\, of\, Equity\, Capital = \frac{Dividend\, at\, Year\, t\,(1 + Average\, Growth\, Rate)}{Stock\, Price}\]This formula helps investors understand how much return they require, given the risk associated with dividend investments. The essential inputs include the expected dividend payment, the rate of growth of these dividends, and the current stock price. By using this model, companies can evaluate whether their shares are undervalued or overvalued, guiding their investment and dividend distribution strategies.

The Cost of Equity Capital represents the return a company needs to justify the risk of investors purchasing its stock. For investors, it acts as a benchmark to evaluate investment choices. This cost is derived using the Dividend Discount Model, considering both the dividends and the expected growth. It is an essential metric because:

• Firms need to balance it with the cost of debt to maintain a low weighted average cost of capital (WACC).
• It tells investors if they are being adequately compensated for the risk of holding a company's equity.

In the provided calculation, our result showed a cost of equity capital of 6.47%. This means that investors should expect at least a 6.47% return per annum to compensate for their investment's risk level.

The dividend growth rate is the percentage increase in the dividends paid to the shareholders. It shows how much the company's ability to pay dividends is improving over time. Calculating this growth rate involves comparing dividends over consecutive years. For example, if a company’s dividend grows from \(0.40 to \)0.45, the growth rate is calculated as:\[Growth\, Rate = \frac{(0.45 - 0.40)}{0.40} = 0.125 = 12.5\%\]This metric is vital because:

• It provides insight into the company's financial health and profitability.
• A steady or increasing dividend growth rate might attract more investors.

In our exercise, the dividend growth rate varied each year, reflecting changes in the company's profitability and cash flow over time.

The Average Growth Rate gives a broader picture of dividend changes over several years. It is computed by averaging the growth rates of dividends from one period to another. To find the average growth rate, we consider the growth over a specific time, use each annual growth rate, and apply the formula:\[Average\, Growth\, Rate = \frac{Growth\, Rate_1 + Growth\, Rate_2 + Growth\, Rate_3 + Growth\, Rate_4}{4}\]This average is crucial for:

• Predicting future dividend payments, which aids in the estimation of stock value.
• Providing a smoothed view of a company's dividend increase, mitigating any anomalies in single-year increases.

In the exercise, the average growth rate was computed as 14.19%, giving a consistent outlook on the company’s average dividend increase over the years.