Question
Which of the following methods involves computing the
cost of capital by dividing the dividend by market price/net proceeds per share?Solution
The method that involves computing the cost of capital by dividing the dividend by market price/net proceeds per share is the Dividend yield method. The dividend yield method is used to calculate the cost of equity capital, which is the return that investors require on their investment in the company's common stock. This method is based on the idea that the cost of equity is equal to the dividend paid by the company divided by the market price of the stock. The formula for calculating the cost of equity using the dividend yield method is as follows: Cost of equity = Dividend per share / Market price per share
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