Using the dividend growth model, what is the cost of equity if the expected dividend next year is Rs. 6, the current share price is Rs. 75 and the constant growth rate is 4%?
Correct answer: C. 12%
- A. 8%
- B. 10%
- C. 12%
- D. 14%
Explanation
The dividend growth model gives the cost of equity as expected dividend divided by current price plus growth. Therefore, 6 divided by 75 plus 4% equals 12%.
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Business finance explains how organisations plan, obtain and use money while balancing risk, return and liquidity. Topics include financial statements, time value of money, budgeting, working capital, capital structure, sources of finance, investment appraisal and cost of capital. Capital budgeting evaluates long-term projects, whereas working capital manages day-to-day operations.
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