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Hi Tutors,
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 thanks
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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