ACCA FM · Chapter 11 · Question 1 of 11
A company is about to pay a dividend of $0.40 per share. Its share price is $6.00 cum div. Dividends are expected to grow at 5% a year. Using the dividend valuation model, what is the cost of equity (to 2 decimal places)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) 12.50%
Explanation
The ex-div price is 6.00 - 0.40 = $5.60. Ke = D0(1 + g)/P0 + g = 0.40 x 1.05 / 5.60 + 0.05 = 0.42 / 5.60 + 0.05 = 0.075 + 0.05 = 12.50%. Using the cum-div price gives 12.00%, and failing to grow the dividend gives 12.14%.
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