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Cost of Equity Capital

Ke= (D1/P0) + g or

Ke= Rf + β*(Rmkt - Rf + CRP)

Country risk premium (CRP) = Sovereign yield spread * (σ of developing country equity index / σ of developed country sovereign bond).

Question: If the difference between the yields of Govt. of India bonds denominated in Rupee and the treasury bonds of USA having same maturity, increases. What will be the effect on the cost of equity of a firm in India?



βlevered= βunlevered * (1 + debt/equity)

Question: A company has been paying a dividend of $ 15 for each stock held. What shall be the stock price of the company if this dividend is expected to be received till infinity and expected rate of return by the investor is 10%?
  1. $15  
  2. b) $150   
  3. c) $100
Ans: b

P0 = 15 / 10% = $150

Question : Stock is quoting at $20, expected dividend is $2, Growth rate = 5%


Cost of equity = 2/20 + 5% = 15%

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