Question

CL

Answer 1

Answer:

The cost of equity is "10.00%".

Explanation:

The given values are:

After tax profits,

= $20 million

Number of shares,

= 1 million

Dividend cover ration,

= 4.0

Market capitalization,

= $50 million

Now,

The earning per share (EPS) will be:

= $\frac{After \ tax \ profits}{Number \ of \ shares}$

On substituting the values, we get

= $\frac{20}{1}$

= $20$ ($)

The dividend cover ratio = $\frac{EPS}{Dividend \ per \ share}$

On substituting the given values, we get

⇒                                  $4.0=\frac{20}{Dividend \ per \ share}$

⇒       $Dividend \ per \ share=\frac{20}{4}$      

⇒                                        $=5$ ($)

Market per share price will be:

= $\frac{Market \ capitalization}{Number \ of \ shares}$

= $\frac{50}{1}$

= $50$ ($) per share

So,

The cost of equity capital will be:

= $[\frac{Expected \ dividend}{Market \ price} ]+Growth \ rate$

On putting the values in the above formula, we get

= $[\frac{5}{50} ]+0.00$

= $0.1+0.00$

= $0.1$ i.e., $10.00$%