The Cost of Equity Assignment Help
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Oftentimes, students get stuck when solving problem based assignments on finance. They are unable to implement the theoretical knowledge that they have acquired over time and as a result, fail to solve the problem successfully. The problems arise mainly out of the fact that they are unable to understand a topic like cost of equity and resolve all the complexities associated with the subject. Thus, in order to pursue the course and successfully complete it is imperative to opt for the cost of equity homework help to understand better.
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About cost of equity
Cost of equity refers to the rate of return a firm pays, in theory to its shareholders to compensate for the risks they take in investing in the company with their capital. It is a way by which companies raise their capital that allow them a chance to grow and operate successfully. While debt is another way to earn capital, however, companies prefer cost of equity over the former because of its higher rate of return.
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How is cost of equity calculated?
Cost of equity is based on two models. The first is the dividend growth model. According to this,
Cost of equity= (Annual divided of next year/current stock price) + dividend growth rate
Second way in which it is calculated is through Capital Asset Pricing Model:
Cost of equity= risk free rate of return + Beta (market return- risk free return)
Cost of equity can be better understood with the help of an example as illustrated by the cost of equity assignment help.
Let the next year’s dividend be $1 of company ABC.
Current stock price= $10, dividend growth rate=3%
Risk free return=3%
Market return= 12%
Then as per the dividend model, cost of equity= 13%
And as per CAPM model, cost of equity= 12%
Importance of cost of equity
The study of cost of equity is really important in the world of finance. It is associated with the measurement of risks that form the difference between whether an investor should invest or not in a firm. The slightest change in cost of equity affects the risk of investment and as a result changes the company’s fair value. For example, if the cost of equity for a company rises from 5% to 6%, then there is one percentage rise in the risk as well. This results in 25% of the decrease in fair value.
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