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XYZ plc has a share price of $5.20 at the end of the year, which is $0.60 higher than it was at the start of the year.
During the year they have paid a dividend of $0.45 per share.
What is the total shareholder return over the year?
ex-dividend market share price = $5.20 – $0.60 = $4.60
Cost of Capital = $0.45/$4.60 = 0.0978 or 9.78%
Yu Huey – your answer is wrong.
The total shareholder return is (0.40 + 0.45) / 4.60 = 18.48%
(The question does not ask for the cost of capital)
Thanks Mr John. Btw. How to get the $0.40? is cost of capital same as required return by the capital provider?
Sorry – I mistyped.
The return over the year is (0.60 + 0.45) / 4.60 = 22.83%
(the 0.60 is the increase in the market value).The cost of equity is equal to the shareholders required rate of return. However the question did not ask for the shareholders required rate of return – it asked what the return was over one year.
(Incidentally, you cannot say that the cost of capital is the same as the required return by the capital provider – it applies to equity, but it does not apply to debt finance because the company gets the benefit of tax relief on the interest whereas the investor receives the full interest.)
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