Market Model - Methods of Computing Cost of Capital
This model is utilized to establish the percentage cost of ordinary share capital cost of equity (K_{e}). If an investor is holding ordinary shares, so he can obtains returns in two (2) forms:
Capital gain is assumed to constitute the difference between the buying price of a share at the beginning of the (P_{0}), the selling price of the same share at the end of the period (P_{1}). Therefore total returns = DPS + Capital gains = DPS + P_{1} - P_{0}.
The amount invested to derive the returns is equal to the buying price at the beginning of the period (P_{0}) therefore percentage return/yield =
(Total returns/Investment) x 100 = DPS + (P_{1} - P_{0})/P_{0} x 100