Cost of Equity Share Capital (ke)
The cost of equity capital is the 'maximum rate of return that the Co. must earn on equity financed portion of its investments in order to go away from the market price of its stock unchanged. Exactly, the cost of equity capital is a function of the expected return by its investors. As it is not legally mandatory for a firm to pay dividends on its equity shares, there is no fixed dividend for equity shareholders. therefore, it is complicated to calculate the cost of equity capital. In the process of doing so, many methods have evolved in computing the cost of equity capital. Some of the most well-liked ones include -
i) Dividend yield method,
ii) Dividend yield plus growth in dividend method,
iii) Earning yield method and
iv) Realised yield method.