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CA Intermediate · Financial Management and Strategic Management · Cost of Capital

Kabir Pharma Ltd's share is currently quoted at ₹200 and its latest dividend D0 is ₹10 per share. Dividends are expected to grow at a constant 6% per year. Using the dividend growth model, what is the cost of equity?

Under the dividend growth model, cost of equity is next year's dividend divided by the current price, plus growth. D1 is 10 × 1.06 = ₹10.60, so 10.60/200 is 5.30%. Adding 6% growth gives a cost of equity of 11.30%.

  1. A11.30%Correct
  2. B11.00%
  3. C12.00%
  4. D5.30%

Explanation

D1 = D0 × (1 + g) = 10 × 1.06 = ₹10.60. Ke = D1/P0 + g = 10.60/200 + 6% = 5.30% + 6% = 11.30%. Using D0 instead of D1 gives 11.00%, ignoring growth in the next dividend. Check: 200 × (11.3% - 6%) = 10.60.

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