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Hello John
Could you please help me with the following question?
-“IPA Co is about a $0.50 dividend on each ordinary share. Its earnings per share was $1.50. Net assets per share is $6. Current share price is $4.50 per share.
What is the cost of capital?
– Could you please help me to tackle the question?
Thanks
The proportion retained is 1.00/1.50 = 0.6667
The return on investment is 1.50/6.00 = 25%
Therefore the growth rate = g = .25 x 0.6667 = 0.1667
Knowing the growth rate and the current share price means you can now use the dividend growth model to calculate the cost of equity.
I do explain all of this in my free lectures.
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