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CS Executive · Corporate Accounting and Financial Management · Cost of Capital

Sundaram Textiles Ltd has an expected dividend next year (D1) of Rs 6 per share, a current market price of Rs 100 per share and a constant growth rate of 5% in dividends. Using the dividend growth model, the cost of retained earnings is:

The cost of retained earnings is 11%. Using the dividend growth model, divide the expected next-year dividend of Rs 6 by the market price of Rs 100 to get 6%, then add the 5% growth rate, giving 11%.

  1. A6%
  2. B5%
  3. C11%Correct
  4. D11.3%

Explanation

Ke = D1/P0 + g = 6/100 + 0.05 = 0.06 + 0.05 = 11%. The 11.3% option wrongly multiplies D1 by (1+g) again, treating 6 as D0. Here 6 is already the next-year dividend.

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