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There’s this question where I could not find the answer by myself. We were only given the final answer but not the workings, therefore I’m struggling and I would love to get some help from you all! 🙂
This is the question,
A company pays ordinary dividend every 6 months, each dividend being 2% higher than the last. The planned dividend for six months time is 51cents. Current cum-div share price is $4.00. What is the annual cost of equity for the company?
thank you so much in advance!
The likelihood of this being asked in Paper F9 is extremely remote.
You calculate the cost of equity in the normal way (exactly as I go through in my lecture), with Do equal to $0.50; g equal to 0.02; and Po equal to $4.00 – $0.50 = $3.50
(Since the dividend in 1 years time is 0.51, the current dividend (Do) must be 0.51/1.02 = $0.50)The answer you get will be the 6 monthly cost of equity.
The annual cost of equity = ((1+r)^2) – 1 (where R is the six-month cost of equity).Sir can you clarify.
My understanding is that the dividend included in cum div share price is 51 cents which is planned. I thought 50 cents has already been paid and cannot be included in cum div price.
I am therefore of the opinion that the ex div price is $4-$0.51=$3.49. can you assist me Sir. in this question I get the same answers if I use $3.50 and $3.49 but I am worried that if the figures are large enough, there may be a significant difference.
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