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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%?
I very much doubt that they have taken the growth as 1%, it should be 10% !!
10% is 2% better than 8%.
Are 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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