CA Intermediate · Financial Management and Strategic Management · Cost of Capital
Nirmal Auto Ltd expects next year's dividend of ₹6 per share, growing at 5% perpetually. The current market price is ₹100. Using the dividend growth model, what is the cost of equity?
The cost of equity is 11%. The dividend yield is the expected next dividend of ₹6 divided by the ₹100 price, giving 6%. Adding the 5% perpetual growth rate gives 11%. The ₹6 is already D1, so it must not be grown again.
- A6%
- B11%Correct
- C5%
- D11.3%
Explanation
Ke = D1/P0 + g = 6/100 + 0.05 = 11%. 6% omits growth. 11.3% wrongly grows the dividend again (6 × 1.05 = 6.3) although ₹6 is already next year's dividend. 5% is only the growth rate.
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