Question

compute required

INS Puration =303822 years QUESTION 2: i ABC Bank has 400,000 shares of ordinary shares outstanding. The shares are traded in the over-the-counter market where the current price is Tshs 600 per share. Dividends per share for the next year are expected to be Tshs 50 and have been growing at the same rate as earrings, 8% a year. The current rate on Treasury bills is 12% and the expected future return for all shares in general is approximately 16%. ABC Bank's shares have a beta of 1.25. REQUIRED: Compute the cost of equity capital using two different methods.[20 marks] Lo, Dovidend capitalization. ATTYNY! . .. .

Answer 1

1. CAPM (Capital Asset Pricing Model)

E(R_i) = R_f + β * (R_m – R_f)

Where:

E(R) = Cost of equity

R_f = Risk-free rate of return = 12%

β = Beta of asset = 1.25

(R_m) = Expected market return = 16%

cost of Equity = 12% + 1.25 (16%-12%)

= 17 %

2. Dividend Capitalization Model

_Ke = (D₁ / P₀) + g

Where:

_Ke = Cost of Equity

D₁ = Dividends/share next year = 50

P₀ = Current share price = 600

g = Dividend growth rate = 8 %

cost of equity = (50 / 600) + 8%

= 16.33%

in dividend capitalisation model cost of equity is less.