The following information relates to Growth Co
Dividend cover
2.2 times
Earnings after tax and preference dividends
$125,000
Return on capital employed
12.5%
Preference dividend
$10,000
Dividend per ordinary share
30c
Cum-div ordinary share price
285c
What is the ex-dividend share price and the cost of equity for Growth Co?
The ex-div share price is ________ c
The cost of equity in Growth Co is ________ % (to one decimal places)
The correct answers are: 255c and 19.4%
The ex div price is 255c (285-30)
The cost of equity is
g = 0.125 x ((2.2 - 1)/2.2) = 6.8%
Therefore cost of equity = = 19.4%
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