Question

Your company share is quoted in the market at Rs. 40 currently. The company pays a dividend of Rs. 5 per share and the investors market expects a growth rate of 7.5% per year: (i) Compute the company’s equity cost of capital. (ii) If the anticipated growth rate is 10% p.a. Calculate the indicated market price per share. (iii) If the company’s cost of capital is 15% and the anticipated growth rate is 10% p.a. Calculate the indicated market price if the dividend of Rs. 5 per share is to be maintained. (Ans. (i) 20%, (ii) 1/10%, (iii) 1/5%)

Answer 1

Solution 1
	Dividend	$                                        5
	Growth rate	7.50%
	Market price	$                                      40
	Cost of capital	R
	Market price=	Dividend/(Cost - Growth)
	40=	5/(Cost - 7.5%)
	(Cost - 7.5%)=	5/40
	(Cost - 7.5%)=	12.50%
	Cost of capital=	20.0%
Solution 2
	Dividend	$                                        5
	Growth rate	10.00%
	Cost of capital	20%
	Market price=	Dividend/(Cost - Growth)
	Market price=	5/(20% - 10%)
	Market price=	$                                50.00
Solution 3
	Dividend	$                                        5
	Growth rate	10.00%
	Cost of capital	15%
	Market price=	Dividend/(Cost - Growth)
	Market price=	5/(15% - 10%)
	Market price=	$                              100.00