Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Cost of equity
- This topic has 3 replies, 2 voices, and was last updated 2 years ago by John Moffat.
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- August 26, 2021 at 4:17 pm #633053
Ques – Dominance Co is considering raising some new finance but there is disagreement at board
level how best to proceed.
The managing director thinks that the company should retain control in the hands of the
existing and loyal shareholders. The finance director feels that the gearing level should be
allowed to increase to benefit from the tax relief allowed on interest.
The existing equity is quoted at $4.20 cum div with an imminent dividend of 16c due any
day. The company earnings have grown at a fairly steady rate of 8% over recent years, but
expectations are for growth to be 2% points better in the future.why have they taken growth rate 1% ? and not 2%?
August 27, 2021 at 7:16 am #633103I very much doubt that they have taken the growth as 1%, it should be 10% !!
10% is 2% better than 8%.
August 30, 2021 at 2:16 am #633449Sir, there are so many mistakes comin from Kaplan book then
August 30, 2021 at 8:10 am #633471Are you sure that there is a mistake in the book? The answer should have used growth of 10% (i.e. 0.10).
Given that I do not know what the question was asking for (and do not know what answer is given) then I cannot say whether or not there is an error.
If the requirement was to calculate the cost of equity then the correct answer is 14.36%.
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