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Hi,
Can you please help with the below question:
The following information relates to Growth Co
Dividend cover – 2.2 times
Earnings after tax and preference dividends – £125, 000
Return on equity employed – 12.5%
Preference dividends – £10,000
Current dividend per ordinary share – 30p
Cum div ordinary shares price – 285pWhat is the cost of equity for Growth Co:
The answer in the book is:
g=b
b= 1.2/2.2
g= 0.125 x (1.2/2.2) = 6.8% growth rate and then uses the dividend growth model to calculate the cost of equity, which I understand.However I don’t understand how the growth rate was calculated…
Thank you
Anya
In future, you must ask in the ask the tutor forum if you want me to answer – this forum is for students to help each other.
Dividend cover = EPS / dividend per share.
So if earnings are 2.2 then dividend is 1 and the retention is 2.2 – 1 = 1.2
So the retention rate (b) is 1.2 / 2.2The return on equity is 12.5% from the question.
So g = 1.2 / 2.2 x 12.5% = 6.8%
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