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CA Intermediate · Financial Management and Strategic Management · Cost of Capital

Tanishq Components Ltd expects a dividend of ₹6 per share next year. The current market price is ₹100 and dividends are expected to grow at a constant 5% per annum. Using the dividend growth model, what is the cost of equity?

The cost of equity is 11%. Under the dividend growth model, cost of equity equals expected next-year dividend divided by current price plus growth rate. Here that is 6/100 plus 5%, which equals 11%. The given dividend is already for next year, so it needs no growth adjustment.

  1. A11%Correct
  2. B6%
  3. C10%
  4. D5.3%

Explanation

Ke = D1/P0 + g. D1 is already the next year's dividend = ₹6. So Ke = 6/100 + 0.05 = 11%. Using 6 x 1.05 as D1 would wrongly give 11.3%; that error is avoided here because D1 is given directly.

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