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Hello Sir,
How does an increase in cost of equity lead to a fall in share price?
If the cost goes up, the shares become less attractive to investors and therefore, the market value of the share (because most investors are not interested in buying it) falls.
Is my understanding correct?
December, 2014, question 4, additional information 8. I don’t see how that information is useful to any of the requirement. Is it?
First question:
The cost of equity increases because shareholders want a higher return on their investment, and in order to be getting a higher return they need to be paying a lower price for the share.
You must watch my free lectures on the valuation of securities because I explain all this there and I cannot simply type out the whole lecture.
Section question:
8 is relevant because the evaluation given in the question shows the interest as a cash outflow. We never show interest in the cash flows – the interest is accounted for when we discount at the WACC.
I mention this in my free lectures on investment appraisal.
Thank you and I did watch your lectures. Remembering the details is obviously my problem. Guess I’d have to watch it again.
Thanks.
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