The current market price of an equity share of Malaba Limited is Ksh 40. The current dividend per share is Ksh 2. The dividends are expected to grow at the rate of 5%. Calculate the cost of the equity capital. (4 marks)July 2020

To calculate the cost of equity capital, you can use the dividend discount model, which states that the price of a share is equal to the present value of all future dividends.

The formula for the cost of equity capital is:

Cost of Equity = D / (R – G)

Where:

• D is the current dividend per share
• R is the required rate of return (also known as the discount rate)
• G is the expected growth rate of dividends

Plugging in the values from the problem, we get:

Cost of Equity = 2 / (R – 5)

To solve for the required rate of return, we can rearrange the formula to solve for R:

R = D / Cost of Equity + G

Substituting in the values, we get:

R = 2 / (40 / 100) + 5 = 0.05 + 5 = 5.05 or 5.05%

Therefore, the cost of equity capital for Malaba Limited is 5.05%.