Cost of equity from dividend growth
Cost of capital · Straightforward · 8 marksMelrose 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
- (ii)Calculate Melrose's cost of equity using the dividend growth model, as a percentage to two decimal places.2 marks
- (iii)Explain the limitations of using the dividend growth model to estimate Melrose's cost of equity.4 marks