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Hello john, I’m reading something here which says ” the higher share value results in a lower cost of equity capital,and hence a lower overall cost of capital for the company”. I’m confused as I thought it would be the opposite. Can you please explain? Thanks
I don’t know where you read that, but as it is written it is terribly badly expressed.
A share price will be higher either because shareholders are expected higher future dividends, or because there required rate of return has reduced. (It is shareholders who fix the market value).
If it is because there required rate of return has reduced, then yes – the cost of equity to the company will also be lower (the company has to give shareholders the return they require).
Its from a preparation question in bpp’s practice & revision kit. Its one of the points listed under ‘implications of a fall in interest rates for a typical company’
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