ABC Co. has 1,00,000 equity shares with ruling market price of Rs. 100 per share. The company has no debts and total earnings are Rs. 10 lakhs per annum. The company wants to raise additional equity capital amounting to Rs. 5 lakhs.
Compute cost of equity capital assuming flotaion cost are 5%.
In this case we have to use Earnings Price Model
according to this model
Ke = (EPS/NP)*100
Where,
EPS = Earning per share
NP = net proceeds
therefore,
EPS = 10,00,000/1,00,000 = Rs. 10 per share
NP = 100-5% = 95
therefore
Ke = (10/95)*100 = 10.53%
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