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Cost of equity

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Cost of equity

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  • September 8, 2020 at 4:52 pm #584154
    afraansar
    Participant
    • Topics: 11
    • Replies: 7
    • ☆

    IPA co is about to pay $0.50 dividend on each ordinary share. EPS was $1.50.
    Net assets per share is $6. Current share price is $4.50.
    What is the cost of equity?

    I don’t understand how the growth is worked out.
    G = rb
    r = rate of return co can earn re-investment (EPS/Net asset per share)
    b= proportion of retained earnings

    Could you explain how r and b is worked out.
    Thank you in advance!

    September 9, 2020 at 7:50 am #584281
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54478
    • ☆☆☆☆☆

    b = (1.50 – 0.50) / 1.50 = 0.66
    r = 1.50 / 6 = 0.25

    g = 0.25 x 0.66 = 0.165

    For more, you must watch my free lectures on this.

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