CMA Intermediate · Financial Management and Business Data Analytics · Cost of Capital
Anand Motors Ltd's equity share is currently quoted at ₹200. It expects to pay a dividend of ₹12 next year, and dividends are expected to grow at 6% per year constantly. Using the dividend growth approach, what is the cost of equity?
The cost of equity is 12%. Using the dividend growth model, the expected dividend yield is ₹12 divided by ₹200, which is 6%, and adding the 6% constant growth rate gives 12%.
- A6.00%
- B12.00%
- C11.64%
- D14.00%Correct
Explanation
Ke = D1/P0 + g = 12/200 + 0.06 = 0.06 + 0.06 = 12%. Check: D1 is already the next year's dividend, so it is not grown again. Wait, 12/200 = 6%, so Ke = 12%.
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