Dividend yield plus growth in dividend method, Financial Management

Assignment Help:

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


Related Discussions:- Dividend yield plus growth in dividend method

Illustrate about foreign exchange earnings, Q. Illustrate about foreign exc...

Q. Illustrate about foreign exchange earnings? In theory foreign exchange earnings must not be hedged as the chances of an adverse movement are equivalent to those of a favoura

What do you mean by economic risk, Q. What do you mean by Economic risk? ...

Q. What do you mean by Economic risk? Transaction risk is appears as the short-term manifestation of economic risk which could be defined as the risk of the present value of a

Monte-carlo simulation model and option adjusted spread, We have seen...

We have seen the valuation of bonds with embedded option using binomial model. This method can be used when cash flows do not depend on how interest rates evolve.

Forward start option and a chooser option, When a company commits (implicit...

When a company commits (implicitly or explicitly) to granting at-the-money options to employees in the future then we can view them as a forward start options. a) Explain the di

Determine the financial structure of business risk, Determine the Financial...

Determine the Financial structure of business risk Financial structure shifts toward suppliers of funds recognize a more highly levered position increased financial risk associ

Explain the working of insurance companies, Insurance companies The pri...

Insurance companies The primary purpose of insurance companies is to protect individuals and firms known as policy-holders from adverse events. Insurance companies receive prem

Define the term shareholders, Shareholders Shareholders are usually ass...

Shareholders Shareholders are usually assumed to be interested in wealth maximisation. This though involves consideration of potential return and risk. Where a company is liste

Equity instruments, QUASI-INSTRUMENTS These instruments are considered ...

QUASI-INSTRUMENTS These instruments are considered as debt instruments for a time-frame and are converted into equity at the option of the investor (or at company's option) aft

Leverage, importance of Leverage

importance of Leverage

Degree of uncertainty in predicting cash balances, Q. Degree of uncertainty...

Q. Degree of uncertainty in predicting cash balances? Probability approaches identify a degree of uncertainty in predicting cash balances and allow for a range of outcomes to

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd