I've doubt in how to find the cost of equity with the use of dividends given I came across 2 questions, IAI may 2012 Q16 and IAI Sep 2016 Q17. The formula they've used to find the cost of equity in 2012 question is (dividend/share price)+ growth rate. But in 2016 paper it is [dividend*(1+growth rate)/share price]+ growth rate. I've 2 doubts here. 1) why they have used the (1+g) factor in 2016 question and 2) how did we find the growth rate in 2013 paper. I didn't understand the way it's been calculated. Can anyone please help?
1) It looks like the May 2012 paper is using projected dividends, whereas the 2016 question is using current dividend - hence it needs to be rolled forward one year to get the expected dividend rate. 2) The rate of growth is being calculated as the retained earnings per share/price per share. Retained earnings per share is earnings per share less expected dividend per share (EPS - DPS)
