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Hi!
First of all thank you veryyyyyy much for your lectures + notes + your replies in the forum.15. Which of the following statements is/are correct?
1 An increase in the cost of equity leads to a fall in share price
2 Investors faced with increased risk will expect increased return as compensation
3 The cost of debt is usually lower than the cost of preference shares
A 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3your answer is C
which means option 1 is wrong.
doubt:
if we look at formula: P (MARKET VALUE)= DIVIDEND/COST OF EQUITY
therefore if cost of equity goes up market value goes down.thank you once again 🙂
I’m am thinking the same option D but the problem is not what you have said
it is point 1.(because answer c is including point 2 and 3 and excluding point 1)thank you for your time MR Elia-Shar-ek but please let Mr.john answer this.(as he is the tutor)
Option 1 is wrong (and it actually not a bad question).
A fall in the share price will lead to an increase in the cost of equity, but not the other way round.
The share price is determined by the return required by shareholders.(Before anyone shouts, the cost of equity does equal the return required by shareholders, but it is the return required by shareholders that determines the market value of the shares. Also the formula does not say MV = dividend/cost of equity! It says MV = dividend/shareholders required rate of return)
well all I can say is that it was a good questions and required a deeper knowledge.
but you have explained well.
thank you!!!
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