Question 18.11: The following information is available in respect of an Indi......

Management Accounting and Financial Analysis for CA Final Examination [995093]

The following information is available in respect of an Indian subsidiary of a US parent.
$\,$ Current dividend per share is Rs 2
$\,$ Current market price per share is Rs 75
Compound growth rates of dividends
Determine the cost of equity, assuming a fixed dividend pay out ratio.

15 per cent	1 –5 years
10	6 – 10 years
5	11 years and beyond

Step-by-Step

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The ke would be obtained by solving for ke in the following equation, as it is the case of different growth rates in expected dividends.

$\,$ Rs 75 $= \sum\limits_{t\,=\,1}^{5}{\frac{\mathrm{Rs \>2\> (1.15)}^t}{(1+k_e)^t} } +\sum\limits_{t\,=\,6}^{10}{\frac{D_5(1.10)^{t- 5}}{(1+k_e)^t} } +\sum\limits_{t\,=\,11}^{\infty }{\frac{D_{10}\,(1.05)^{t- 10}}{(1+k_e)^t} }$

$\,$ The solution of the above equation gives the value of $k_e$ equal to 9.5 per cent.

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