This problem is part of Cost of Capital.
Equity shares of ABC Co. are currently selling for Rs. 125 per share. The company expects to pay Rs. 15 per share as dividend at the end of the coming year, and the estimated growth rate is 6%. It is expected that new equity shares can be sold at Rs. 123;
The company expects to incurr Rs. 3 per share as floatation cost. What is the cost of Equity capital ?
I got the Answer for this Question.
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%
CAclubindia
