WACC (TUFA CO.)

Hi Sir,

For Question Tufa Co.

Why is 0.05 used in the calculation of Cost of Equity as per below?

Examiners Answer:

Cost of equity
Cum div share price ($ per share) 7·52
Ex div share price ($ per share) 7·07 –––––
Dividend for 20X7 ($ per share) 0·45
Dividend for 20X3 ($ per share) 0·37
Dividend growth rate (%) 5·02 [(0·45/0·37)0·25 – 1]
Cost of equity (%) 11·7 [((0·45 x 1·05)/7·07) + 0·05]