Q. P Ltd. presently pays a dividend of Rs. 1.00 per share and has a share price of RS. 20.00.
Suppose the dividends are expected to grow at a rate of 20% per annum for 5 years and 10% per annum thereafter. Calculate Cost of Equity.
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Cost of Capital - FM Question.
Replies (30)
as far as i am thinking..the answer will be 25%
plz show the working also..
Won't the present value method be used here ???
but are u sure...??
what i am saying is that:
1.we should use pv for for 5 years to arrive at the cost of share today.
2.give a rs.1.20 dividend
3.use the growth rate as 20% as given in the question.
but i maybe wrong....
let others throw some light here....
is this type of question in ca module??
@ Gaurav: Answer is not 25%.
@ Navya: Thats what I do, with the exception that I use 'g' as .10. Btw, your answer is also wrong.
Also, there is a single cost of equity, for now as well as for future.
@ All: The answer is 18.09%.
@ abhishek :
can u please post the workings??
Ok. Here are the workings.
thanku..... today i approached my lecturer he 2 suggested me the same answer
as said by Mr. Abishek....
Thanku Abishek....
D1 : 1.2
D2 : 1.2*120% =1.44
D3 : d2 *120% =1.728
D4 :d3*120%=2.0736
D5 :d4* 120%=2.49
D6: D5*120% =2.99
Ke= D1/P0+g (here D1 =D6 since there is constant groth thereafter)
Ke = 2.99/20+10%
Ke = 10.15%
[it is assumed that dividends are paid every year & price of the share remains unchanged ]
if any other assumption is made ,the solution will change acordingly
| Originally posted by : navya | ||
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please give the detailed solution if possible
answer will be 18.11%... i will give the workings...2 mins
with 20% growth in 1st 5 years....
D1=1.2
D2=1.44
D3=1.728
D4=2.0736
D5=2.488
P5=price of share in 5th year will be = {D5(1+0.1)}/(Ke-0.10) = 2.737/(Ke-0.10)
Discount all these values with the cost of equity( which we have to calculate)...and we will get the present price of share...which is rs. 20
To get the present price of share i.e rs. 20 discount all these( D1 to D5 and P5) with the Ke which we have to assume on hit and trial basis....take 18% and 19% ........equate it with 20..
do interpolation ...and you will find out the ke approximately 18.11%
answer= Ke = 18.11%
| Originally posted by : hetal | ||
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D1 : 1.2 D2 : 1.2*120% =1.44 D3 : d2 *120% =1.728 D4 :d3*120%=2.0736 D5 :d4* 120%=2.49 D6: D5*120% =2.99 Ke= D1/P0+g (here D1 =D6 since there is constant groth thereafter) Ke = 2.99/20+10% Ke = 10.15% [it is assumed that dividends are paid every year & price of the share remains unchanged ] if any other assumption is made ,the solution will change acordingly |
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Your answer is not correct
| Originally posted by : Sneha Bagla | ||
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with 20% growth in 1st 5 years.... D1=1.2 D2=1.44 D3=1.728 D4=2.0736 D5=2.488 P5=price of share in 5th year will be = {D5(1+0.1)}/(Ke-0.10) = 2.737/(Ke-0.10) Discount all these values with the cost of equity( which we have to calculate)...and we will get the present price of share...which is rs. 20 To get the present price of share i.e rs. 20 discount all these( D1 to D5 and P5) with the Ke which we have to assume on hit and trial basis....take 18% and 19% ........equate it with 20.. do interpolation ...and you will find out the ke approximately 18.11% answer= Ke = 18.11% |
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Her calculation and approach is absolutely correct.
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