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CMA Intermediate · Financial Management and Business Data Analytics · Cost of Capital

Bharat Pumps Ltd paid a dividend of Rs 10 per share this year. Dividends have grown at 8% each year and this growth is expected to continue indefinitely. The share's current ex-dividend market price is Rs 270. Using the dividend growth model, what is the cost of equity?

The cost of equity is 12%. The Rs 10 dividend is already paid, so next year's dividend is 10 x 1.08 = Rs 10.80. Dividing by the price of Rs 270 gives a 4% yield, and adding 8% growth gives 12%.

  1. A11.7%
  2. B12.0%Correct
  3. C8.0%
  4. D11.2%

Explanation

The dividend just paid is D0 = Rs 10, so D1 = 10 x 1.08 = Rs 10.80. Ke = 10.80/270 + 0.08 = 0.04 + 0.08 = 12%. The 11.7% option uses D0/P0 (3.7%) + 8%, which ignores growth in the dividend; 11.2% and 8% are not obtained from the data.

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