Harry Potter Ltd. is expected to pay an annual dividend of ₹ 0.80 a share next year. The market price of the stock is ₹ 22.40 and the growth rate is 5%. What is the firm’s cost of equity?Options :7.58 percent7.91 percent8.24 percent8.57 percent
Question
Harry Potter Ltd. is expected to pay an annual dividend of ₹ 0.80 a share next year. The market price of the stock is ₹ 22.40 and the growth rate is 5%. What is the firm’s cost of equity?Options :7.58 percent7.91 percent8.24 percent8.57 percent
Solution
The cost of equity can be calculated using the Gordon Growth Model, also known as the Dividend Discount Model (DDM). The formula is:
Cost of Equity = (Dividends per share / Market value per share) + Growth rate
Given in the problem:
Dividends per share (D1) = ₹ 0.80 Market value per share (P) = ₹ 22.40 Growth rate (g) = 5% = 0.05
Substituting these values into the formula:
Cost of Equity = (0.80 / 22.40) + 0.05 = 0.0357 + 0.05 = 0.0857 or 8.57%
So, the firm's cost of equity is 8.57 percent. Therefore, the correct option is 8.57 percent.
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