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<p style="text-align:justify;"><span>(<strong>a) CAPM, </strong></span></p> <p style="text-align:justify;"><strong><span>(b) Dividend Discount Model,</span></strong></p> <p style="text-align:justify;"><strong><span>(c) Rate of Pref. Dividend Plus Risk,</span></strong></p> <p style="text-align:justify;"><strong><span>(d) Price-Earnings Ratio.</span></strong></p>
D is the correct answer because
Cost Of Equity' In financial theory, the return that stockholders require for a company. The traditional formula for cost of equity (COE) is the dividend capitalization model:
A firm's cost of equity represents the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership.
Investopedia explains 'Cost Of Equity'
Let's look at a very simple example: let's say you require a rate of return of10% on an investment in TSJ Sports. The stock is currently trading at $10 and will pay a dividend of $0.30. Through a combination of dividends and share appreciation you require a $1.00 return on your $10.00 investment. Therefore the stock will have to appreciate by $0.70, which, combined with the $0.30 from dividends, gives you your10% cost of equity.The capital asset pricing model (CAPM) is another method used to determine cost of equity.
Answer D . Price earning ratio. The main difficulty is that to determine the "rate of growth "of price appreciation.
Regards,
Joshi Mathew
CIA
CAPM, Dividend Discount Model, Price/Earning ratios all are acceptable but preference dividend is not right approach to calculate Cost of Equity. its nature is like a long term secured loan.
Correct answer is C
Answer D correct answer
d
D. Price Earnings Ratio:
Calculated as: Market Price / Diluted Earnings.
