- October 19, 2021 at 1:43 pm #638489KatrinMember
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- Replies: 1
I am confused on the calculation of the cost of equity from the below question:
March Co operates and manages a number of theme parks. The capital structure of March
Co as at 1st January 2016 is as follows:
Issued ordinary shares (25c shares) 250m
The ordinary shares have a current market price of $2 each. Dividends per share (in cents)
in the five preceding years were as follows:
2011 2012 2013 2014 2015
6.9 7.2 8.8 9.6 10.5
The ordinary dividend for 2015 has just been paid.
Growth of dividends: 0.11
Cost of equity: (10.5*1.11/200)+0.11=16.83%
Why do they divide by 200?
Many thanksOctober 19, 2021 at 4:53 pm #638524John MoffatKeymaster
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Because the formula state to divide by the market value.
Given that the dividend is included in cents (10.5) the market value should be stated in cents also, and a market value of $2 is 200 cents. (If you prefer show them both in $’s (so 0.105 and 2) and you get the same answer.)
Have you not watched my free lectures on this? The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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