CA Inter P6 · Chapter 4 · Question 10 of 10
Jyoti Ltd has EPS of ₹ 10 and has just paid a dividend of ₹ 4 per share. It earns a return of 15% on retained earnings, and this retention policy is expected to continue. If the share price is ₹ 60, the cost of equity using the dividend growth model is closest to:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 16.27%
Explanation
Retention ratio b = 1 - 4/10 = 0.6, so g = b x r = 0.6 x 15% = 9%. D1 = 4 x 1.09 = ₹ 4.36. Ke = 4.36/60 + 0.09 = 7.27% + 9% = 16.27%. Using the payout ratio instead of the retention ratio to estimate growth (g = 6%) is a common error.
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