Cost of capital

Question 1

What is the formula for Ke using dividends and current share price?

Answer 1

Ke = D(1+g)/P + g

D: Dividend expected
G: Growth rate
P: Ex-div share price

Question 2

What is the historic method for estimating dividend growth?

Answer 2

Look at dividends paid per share in previous periods.

G = (D1/D0)^(1/n) - 1

D1: Latest div paid
D0: Earliest div paid
N: No. years or periods

Question 3

What is the earnings retention method for estimating dividend growth? (Gordon growth method)

Answer 3

G = R x B

R: Accounting rate of return of the new investment.

=Earnings / opening shareholder’s funds

B: Earnings retention rate

=Retained profit for the year / Earnings

Question 4

What is the formula for Kp using dividends and current share price?

Answer 4

Kp = D/P

D: Dividend expected
P: Ex-div share price

Question 5

What is the formula for Kd using interest rates and current share price?

Answer 5

Kd = i(1-T) / P

I: Annual interest in 1yrs time
T: Tax
P: Share price

Question 6

What is the current share price value?

Answer 6

Present value of expected future dividends discounted at:

Ke: Ke
Kp: Kp
Kd: Investors’ required return