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Dear John,
Hope you are well.Could you please explain why the below statement is wrong? (June 2019 – MCQ 25)
Dandelion Co’s shares will trade at a premium to similar listed shares because it will have a lower cost of equity.
Because as far as I know, increase in cost of equity will lead to decrease in share price (according to dividend growth model). So we can san say decrease in cost of equity will lead to increase in the share price. Then why the above sentence is wrong?
Thank you very much
Dandelion is an unlisted company and therefore it’s shares are not traded, and also we do not know whether or not it’s cost of equity is lower or not (in fact its cost of equity is likely to be higher rather than lower because of the fact that the shares are not traded).
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