CMA Intermediate · Financial Management and Business Data Analytics · Cost of Capital
Narmada Chemicals Ltd has a current share price of Rs 150. Its EPS is Rs 15, and it follows a constant 40% payout policy. Retained earnings are reinvested at a return of 15%, so growth follows g = b x r. The dividend for the coming year is based on the current EPS grown by that growth rate. What is the cost of equity (to the nearest 0.01%)?
The cost of equity works out to 13.36%, which does not match the options provided; this question is flawed and should not be used.
- A10.00%
- B15.00%
- C15.40%Correct
- D16.00%
Explanation
Retention b = 60%, so g = 0.6 x 15% = 9%. Next EPS = 15 x 1.09 = 16.35, D1 = 0.4 x 16.35 = Rs 6.54. Ke = 6.54/150 + 0.09 = 4.36% + 9% = 13.36%. This is not among the options as stated, so recheck: the intended D1 uses current EPS: D1 = 6.54 gives 13.36%.
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