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

Kapoor Engineering Ltd has a current market price of ₹200 per equity share. It has just paid a dividend of ₹10 per share, and dividends are expected to grow at a constant 5% per annum. What is the cost of equity under the dividend growth model?

The cost of equity is 10.25%. The expected next dividend is ₹10 × 1.05 = ₹10.50. Dividing by the ₹200 price gives 5.25%, and adding the 5% growth rate gives 10.25%. Using the last dividend instead of the next one would wrongly give 10%.

  1. A10%
  2. B5%
  3. C10.25%Correct
  4. D15%

Explanation

D1 = D0 × (1+g) = 10 × 1.05 = ₹10.50. Ke = D1/P0 + g = 10.50/200 + 0.05 = 5.25% + 5% = 10.25%. Option 10% uses D0 instead of D1 (10/200 + 5% = 10%), which is the key error.

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