A company's share is currently selling for Rs. 50 and is expecting a dividend of Rs. 3 per share after one year which is expected to grow at 8% indefinitely. What is the equity capitalisation rate?

The correct answer is 14 percent 

Key Points

•  Equity Capitalisation Rate: ECR is a measure of capitalization that illustrates the relationship between property income and investor equity.
• The Capitalization Rate may take into account a number of variables, however it does not account for future risk.

Important Points

•  P (Price per share) = Rs. 50
• Expected Dividend = Rs. 3 per share
• Growth  = 8%

Calculation of Equity Capitalisation Rate:

•  P        =    D  / K_e  - g

             50     =   3   /  K_e  -  0.08

          K_e  -  0.08   =  3 / 50

          K_e  - 0.08    = 0.06

           K_e                   = 0.06 + 0.08

           K_e                    = 0.14 

           K_e               = 14%

Hence, The correct answer is 14 percent .