Cost of capital

Question 1

Cost of equity formula

Answer 1

Ke = D0(1+g)/P0 + g

Question 2

Should share price be ex div or cum div

Answer 2

Ex div

Question 3

Find dividend growth using historic method

Answer 3

=POWER(latest/oldest,1/no. of growth periods) - 1

Question 4

Earnings retention rate dividend growth method and explain the components

Answer 4

g = r x b
r = accounting rate of return (earnings/opening SH funds)
b = earnings retention rate (retained earnings for period / Earnings)

Question 5

Cost of preference share formula

Answer 5

Kp = D/P0

Question 6

Cost of irredeemable debentures formula and explain components

Answer 6

Kd = yield * (1-T)

yield = i/P0 where i is interestR

Question 7

Cost of redeemable debentures formula

Answer 7

Kp = yield * (1-T)

yield achieved using =RATE formula (ensuring MV is negative)

Question 8

MV of redeemable debentures method

Answer 8

=PV function

Question 9

What to do when there is a convertible debenture in the Kd calculation

Answer 9

Compare redemption value with value of conversion option
Select the higher of the two values to be used in =RATE function as redemption value