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!
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Annual cost of equity
9y ago#1The 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.
9y ago#3If they are paying dividends every six months, then the cum div price will increase the current dividend, which is 50c.
What I wrote before is correct!
(But again, I don't know where you found this question, but it is not really relevant for F9)
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