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how can we compare Cost of Equity with Dividends ?. I mean Cost of Equity is the return required by Equity holders on the risk they bear and dividends is the return they receive.
Lets take a simple example:
If equity is $ 100,000. and Dividend is Rs. 5,000 while Ke is 7.5%
can we say Required Return on Equity is 7,500 but Dividend is 5,000. and Equity holders are receiving lesser return.
Ignoring the fact that return is also in the shape of increase in Share Price.
Please comment on this theory.
The shareholders required return and the dividends are what determine the market value.
The calculation of the required return (and therefore cost of equity) is working backwards if we know the dividend, the growth rate in dividends, and the market value.
In your illustration, the market value of the shares will not be 100,000. If there is no dividend growth then the market value will be 5000 / 7.5%. If there is growth then it is the formula on the formula sheet (rearranged): Ke = Do(1+g)/Po + g
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