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Underestimated Ltd’s ordinary shares currently sell for $36 per share. The company believes that its shares...

Underestimated Ltd’s ordinary shares currently sell for $36 per share. The company believes that its shares should really sell for $54 per share. If the company just paid an annual dividend of $2 per share and the company expects those dividends to increase by 8 per cent per year forever (and this is common knowledge to the market), what is the current cost of ordinary equity for the company and what does the company believe is a more appropriate cost of ordinary equity for the company

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Answer #1

Current cost of ordinary equity for the company = D1/Price+ growth rate

= 2*108%/ 36+ 8%

=14%

Appropriate cost of ordinary equity for the company = D1/Price+ growth rate

= 2*108%/54+8%

=12%

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