A company's stock sells for Rs. 63. The company pays an annual dividend of Rs. 3 per share and has a…
According to the Gordon Constant Growth Dividend Valuation Model, the cost of equity (Ke) is calculated as (D1 / P0) + g, where D1 = D0(1 + g). Given D0 = Rs. 3, g = 5% =…
Choose your answer
A company's stock sells for Rs. 63. The company pays an annual dividend of Rs. 3 per share and has a long-established record of increasing its dividend by a constant 5% annually. For this company, the cost of equity (Ke) is __________.
Answer and explanation
Correct answer C
According to the Gordon Constant Growth Dividend Valuation Model, the cost of equity (Ke) is calculated as (D1 / P0) + g, where D1 = D0(1 + g). Given D0 = Rs. 3, g = 5% = 0.05, and P0 = Rs. 63, expected dividend D1 = 3 × 1.05 = Rs. 3.15, or if Rs. 3 is the expected annual dividend, (3.15 / 63) + 0.05 = 0.05 + 0.05 = 10%.
Practice for these exams
-
UGC NET Commerce