CA Intermediate · Financial Management and Strategic Management · Cost of Capital
Sundaram Textiles Ltd's equity share has a current market price of ₹250. It has just paid a dividend of ₹15 per share, and dividends are expected to grow at a constant 6% per annum. What is the cost of equity using the dividend growth model?
The cost of equity is 12.36%. The dividend just paid is ₹15, so the expected next dividend is ₹15.90 after 6% growth. Dividing ₹15.90 by the price of ₹250 gives 6.36%, and adding growth of 6% gives 12.36%.
- A12.00%
- B12.36%Correct
- C6.36%
- D11.40%
Explanation
D1 = 15 x 1.06 = ₹15.90. Ke = D1/P0 + g = 15.90/250 + 0.06 = 6.36% + 6% = 12.36%. Using D0 instead of D1 gives 6% + 6% = 12%, which is the key distractor and is wrong because the model needs next year's dividend.
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