- 5 Marks
FM – L2 – Q20 – Cost of capital
Calculate WACC using dividend growth model for cost of equity, given dividend, share price, and debt details.
Question
A company, Volta Ventures Ltd, has just paid an annual dividend of GH¢0.18. Investors expect the annual dividend to grow by 3% each year in perpetuity. The current share price is GH¢1.55, and the total market value of the company’s shares is GH¢1,200,000.
The company has debt capital on which the yield is 7.8% before tax. The rate of tax is 30%. The total value of the company’s debt is GH¢350,000.
Calculate the weighted average cost of capital. Use the dividend growth model to estimate the cost of equity.
Find Related Questions by Tags, levels, etc.
- Tags: Cost of Equity, Debt Capital, Dividend Growth Model, Financial management, WACC
- Level: Level 2
- Topic: Cost of capital
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