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:

1. Dividends
2. Capital gains

Capital gain is assumed to constitute the difference between the buying price of a share at the beginning of the (P₀), the selling price of the same share at the end of the period (P₁).  Therefore total returns = DPS + Capital gains = DPS + P₁ - P₀.

The amount invested to derive the returns is equal to the buying price at the beginning of the period (P₀) therefore percentage return/yield =

(Total returns/Investment) x 100 = DPS + (P₁ - P₀)/P₀ x 100