Gross Dividends: ￡1.5m
Market Price per ordinary share: ￡4.00
No. of Ordinary ￡1 Shares: 5m
Growth: 5%
use Gordon growth model: Price at t=0 "P0" = D1 / (r - g) and solve for r...
D1 = D0(1 + g)
D0 = ￡1.5m / 5m = 0.30
D1 = 0.30(1.05) = 0.315
P0 = D1 / (r - g)
4 = 0.315 / (r - 0.05)
0.07875 = r - 0.05
r = 0.12875, or 12.875% cost of equity
Here is what I have been given,
Profit for the Year: ￡3m
Gross Dividends: ￡1.5m
Market Price per ordinary share: ￡4.00
No. of Ordinary ￡1 Shares: 5m
Coupon interest on loan capital: 8%
Debenture (bond) Yield to market for level of risk: 7%
Book Value of debenture 4 years later: ￡10m
Growth: 5%
Each debenture is issued in ￡100 denomination
Tax rate: 25%
What's the cost of equity capital?
You could also find the market value for the debt
