Historical growth rate of dividends |
Closing / Opening |
1.74/1.29 |
1.35 |
This is the growth achieved over 3 years |
Hence, growth rate = |
(cube root of 1.348837) - 1 |
10.49% |
Calculation of cost of capital | Formula | Calculation | Result | |
Debt | Interest rate (1-Tax rate) | 10.9(1-0.3) | 7.63 | % |
Preferred stock | Preference dividend / Price of pref. stock net of floatation cost | (7 / 74(1-0.03))*100 | 9.18 | % |
Equity | P = D1 / (K - g) using Gordon's model | |||
Price P = 54 | ||||
Dividend at end of year 1 (D1) = 1.74 | ||||
Growth rate (g) = 10.49% (as above) | ||||
54 = 1.74 / K - 10.49% | ||||
Cost of equity K = | (1.74/54 + 0.1049)*100 | 13.71 | % | |
Weighted average cost of capital | Cost | Weight | Weight * Cost | |
Debt | 7.63 | 20% | 1.526 | % |
Preferred stock | 9.18 | 10% | 0.92 | % |
Equity | 13.71 | 70% | 9.60 | % |
Weighted average cost of capital | 12.0421231 |
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