The current market price per share of New Age Limited is Rs. 80. The dividend expected a year from now is Rs. 4 and it is expected to grow at a constant rate of 10 percent. The floatation (issue) cost for the new issue will be 8 percent. What is the cost of new equity?

Question

Question

This question was previously asked in

UGC NET Paper 2: Commerce 29 Sep 2022 Shift 2

Answer 1

The correct answer is 15.43 percent

Key PointsCost of new equity = \([\frac {D_1}{P_0 (1-f)}\times 100 ]+G\text%\)

Where, D₁ = Expected Dividend for Next Year

P₀ = Current Market Price of Share

G = Growth Rate

f = Floatation Cost

Important Points

Cost of new equity =\([\frac {D_1}{P_0 (1-f)}\times 100 ]+G\text {%}\)

Cost of new equity =\([\frac {4}{80 (1-0.08)}\times 100 ]+10\text {%}\)

Cost of new equity = \([5.434\text%+10\text {%}]\)

Cost of new equity = \(15.43 \text %\)