Question

What will be Cost of equity capital if the current dividend paid by the company is Rs. 5 per share, the market price of the equity share is Rs. 100 and the growth rate of dividend is expected to remain constant at 10%. A. 14% B. 16% C. 15% D. 13%

Answer 1

Answer:

The correct answer is option (C)

Explanation:

Value as per $DDM: V0 =D1 /(Ke –g),$

$g=ROE X Retention ratio = (.18)(.8) =.144 or 14.4%$

$V0 = 1/(.16 - .144) = 62.5$

Walter’s Model: $V0 = (D/Ke)+[(EPS – D) R/Ke]/ Ke$

$V0 =(1/.16)+ [(5- 1)(.18/.16)]/.16$

$=34.37$

Earnings Capitalisation Method:

$V0 =[EPS1/Ke] + [RE1(R/Ke) –1]/ (Ke –g)$

$=(5/.16) +4 [(.18/.16) – 1]/(.16 - .144)$

$= 31.25 + 31.25$

$= 62.5$