Compute Cost of Equity Capital

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Solution:

Current Selling price  = Rs. 125

Dividend (d1) = Rs. 15

Estimated Growth rate = 6%

Issue price of new Equity share = Rs. 123

Flotation of new Equity share = Rs. 3

Net Proceedings = 123 - 3 = Rs. 120

Cost of Equity Capital = Ke =  ( d1 / MP ) + g  => 15 / 120  +  0.06  =  18.5 %
 

Ke = D1/NP + g

where,

D1 = expected dividend

NP = Net Proceeds

D1 = 15

NP = 123-3 = 120

therefore,

Ke = (15/120)*100 + 6%

therefore, Ke =  12.5% +6% = 18.5%