CS Executive · Corporate Accounting and Financial Management · Cost of Capital
Arvind Textiles Ltd has a current market price of ₹100 per share. It has just paid a dividend of ₹8 per share (D0), and dividends are expected to grow at 5% per year forever. What is the cost of equity using the dividend growth model?
The cost of equity is 13.4%. The next-year dividend is 8 × 1.05 = ₹8.40, giving a dividend yield of 8.4% on the ₹100 price, and adding the 5% growth rate gives 13.4%.
- A13.00%
- B13.40%Correct
- C8.00%
- D12.60%
Explanation
D1 = 8 × 1.05 = ₹8.40. Ke = 8.40/100 + 0.05 = 0.084 + 0.05 = 13.4%. Using D0 directly gives 8/100 + 5% = 13%, which ignores that the model needs next year's dividend.
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