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IAI Actuarial Core Principles · Business Finance · Structure and methods of financing a company

Rohan Ltd's shares are priced at ₹200 ex-dividend. The dividend just paid was ₹10 per share and dividends are expected to grow at 5% a year indefinitely. Using the dividend growth model, what is the cost of equity?

The cost of equity is 10.25%, being the next dividend of ₹10.50 divided by ₹200 (5.25%) plus growth of 5%. This is not among the options, so the item is flawed.

  1. A5.0%
  2. B10.0%
  3. C10.5%Correct
  4. D5.25%
  5. 15.0%

Explanation

Next dividend = 10 x 1.05 = ₹10.50. Cost of equity = 10.50/200 + 5% = 5.25% + 5% = 10.25%. This is not 10.5%; the correct figure of 10.25% is absent, so recheck options.

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