Raj Ltd. has issued 1200 equity shares of Rs. 100 fully paid up. The market price of these shares are Rs. 170 per share. The company has paid a dividend of Rs. 12 per share. Find out the cost of capital.

The correct answer is - 0.075

Key Points

• Cost of Capital
  • The cost of capital can be calculated using the formula for the cost of equity: Cost of Equity (Ke) = (Dividend per Share / Market Price per Share) + Growth Rate.
  • In this case, there is no growth rate provided, so the formula simplifies to: Ke = Dividend per Share / Market Price per Share.
  • The dividend per share is given as Rs. 12, and the market price per share is Rs. 170.
  • Using the formula: Ke = 12 / 170 = 0.0705882.
  • Converting this to a percentage: 0.0705882 * 100 = 7.05882% which is approximately 7.06%.

Additional Information

• Market Price
  • The market price of a share is the current price at which the share is being traded on the stock market.
  • It reflects the value that investors are willing to pay for the share at a given point in time.
• Dividend
  • A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits.
  • Dividends can be issued as cash payments, as shares of stock, or other property.
• Cost of Equity
  • The cost of equity is the return a company requires to decide if an investment meets capital return requirements.
  • It represents the compensation the market demands in exchange for owning the asset and bearing the risk of ownership.