Dividend yield plus growth in dividend method, Financial Management

Dividend yield plus growth in dividend method

When the dividends of the firm are predictable to grow at a constant rate and the dividend payout ratio is constant, this technique may be used for calculating the cost of equity shares.

387_dividend yield method.png

Where, Ke = cost of Equity capital, D = Expected dividend per share, g = rate of growth in dividends, MP = Market price of equity shares and NP = Net proceeds per share

Illustration:

A Co. plans to issue 1000 new shares of Rs.100 each at par.  The floatation costs are expected to be 5% of the share price. The co. pays a dividend of Rs.10 per share initially and the growth in dividends is expected to be 5%. (a) Compute the cost of new issue of equity shares. (b) If the current market price of an equity share is Rs.150, calculate the cost of existing equity share capital

Solution: (a)  K = D + g =        10  + 5% = 15.53%

1276_dividend yield method1.png

Posted Date: 10/16/2012 12:57:30 AM | Location : United States







Related Discussions:- Dividend yield plus growth in dividend method, Assignment Help, Ask Question on Dividend yield plus growth in dividend method, Get Answer, Expert's Help, Dividend yield plus growth in dividend method Discussions

Write discussion on Dividend yield plus growth in dividend method
Your posts are moderated
Related Questions
BAGS, Inc. is considering an investment in a new project. The required investment is $1,000,000. After-tax net cash flows are expected to be $50,000 the first year and are expected

What impact does high inflation have on the value of a business? Besides causing distortion (as it unequally affects all goods and services), inflation enhances the uncertainty

Define the term- Cash purchases     Shareholders of the target company are bought out completely and have no further stake in business. This is good if predator shareholders want

What is the nature of a concessionary loan and how is it handled in the APV model? A concessionary loan is a loan that is provided by a governmental body at below the normal ma

Board should encourage a strong control culture. Manager's bonus must not only be linked to company profits but also linked to internal control procedures being adhered to. There m

Question: PART A With the view to modernise its accounting system Government is considering adopting International Public Sector Accounting Standards (IPSAS) so as to maxim

AGENCY THEORY An agency relationship may be defined as a contract under which one or more people (the principals) hire another person (the agent) to perform some services on th

What is Institutional Finance A nation's economic structure comprise a number offinancial institutions, like banks, pension funds, insurance companies, creditunions. These i

The banking sector has a vital and active role in the money market. The transactions taking place in these securities are large in size, both in terms of volumes

Project Budgets and Reporting Systems: In many cases, where a project is initiated and a budget allocated, a separate account is created to ensure costs attributable to that pr