Approaches to Calculate Cost of Equity Homework Help

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The stockholders often require returns for their investment in the companies, that return is termed as cost of equity. It represents the compensation which the market demands for having the assets and the ownership. There are several methods to calculate the cost of equity. Since the share capital carries no explicit capital, it is a bit tricky to calculate the cost of equity. The cost that a company needs to maintain the share price which is satisfactory to the investors is the cost of equity. Approaches to Calculate Cost of Equity Homework Help shall elaborate the different approaches to calculate the cost of equity.
 

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Methods to Calculate Cost of Equity

 
There is a difference in calculating the cost of debt and cost of equity. Unlike the prior one, calculating the cost of equity is a bit different since it involves various approaches. Few of those approaches have been mentioned below in the Approaches to Calculate Cost of Equity Homework Help.
 
• Dividend price approach- according to this method, cost of equity is calculated simply by dividing dividend per share with market value of per share. This indicates a direct relationship between prices of dividend and prices of equity shares. In some cases, inflation adjustments are also made so as to have a more genuine cost of equity.
 
• Earning price approach- The market value per share and dividend per share are two different things which cannot be correlated but the total earning when correlated with the market value of shares can be used to calculate the cost of equity. Instead of dividend per share, it is replaced by earnings per share. Students can refer to Approaches to Calculate Cost of Equity Homework Help for further information.
 
• Realised yield approach- In this method, we calculate the cost of equity after analysing the past payments of dividend. Followed by adding the growth rate percentage in the general formula of cost of equity capital. This method is an improved version of dividend price approach. Also here the dividend per share value is the real value and not an expected value.
 
But before applying these approaches in the calculation of cost of equity, the expectations of the investors as well as the company’s current earning should be taken into consideration.Accordingly, it has to be decided whether the percentage of growth and inflation in original dividend per share has to be added for calculating the cost of equity or not. Thus, it can be studied in Approaches to Calculate Cost of Equity Homework Help. Earning price approach can be used in the cases of high credit sale values and other outstanding incomes.
 

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