CMA Final · Strategic Financial Management · Equity and Bond Valuation and Evaluation of Performance
Arjun Ltd has a current market price of Rs 90. Its next dividend is Rs 6 and it is expected to grow at 5% per year indefinitely. What is the market-implied cost of equity?
The implied cost of equity is 11.67%. The dividend yield of 6.67% (Rs 6 divided by Rs 90) is added to the 5% growth rate. Omitting growth would give only the yield, which understates the return investors expect.
- A11.67%Correct
- B6.67%
- C12.00%
- D5.00%
Explanation
ke = D1/P0 + g = 6/90 + 0.05 = 0.0667 + 0.05 = 11.67%. Option 6.67% is only the dividend yield, omitting growth. Checking: 6/(0.1167-0.05) = Rs 90.
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