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Cost of equity from dividend growth

Cost of capital · Straightforward · 8 marks

Melrose Kitchens plc has paid the dividends per share shown in the table. The 20X5 dividend has just been paid, and the share price is now £3.20 ex dividend. The directors expect dividends to keep growing at the same average annual rate as over the last four years.

Year	Dividend per share (pence)
20X1	15
20X2	16
20X3	17.2
20X4	18.6
20X5	20

(i)
Calculate the average annual rate of growth in dividends from 20X1 to 20X5, as a percentage to two decimal places.
2 marks
Your answer
(ii)
Calculate Melrose's cost of equity using the dividend growth model, as a percentage to two decimal places.
2 marks
Your answer
(iii)
Explain the limitations of using the dividend growth model to estimate Melrose's cost of equity.
4 marks

Every topic, by weight

Corporate governance and organisation, 18%

Governance, Shareholder wealth

How corporates are financed, 35%

Sources of finance, Taxation, Securities, New issues, Capital structure

Evaluating projects, 15%

Cost of capital, Project appraisal

Constructing and interpreting company accounts, 32%

Building accounts, Cash flows and groups, Ratios

In the course

14 lessons
127 questions
2 mock exams

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