The dividend growth model has been used by Investor Ltd, an investment advisory company, to value the Australian share market. In January this year, the company assumed that the historic dividend yield of 4% per annum, the normal cost of equity capital of 7% per annum, and the long-term dividend growth rate of 2.5% per annum would continue for the Australian share market for many years to come. However, several months later, due to the effects of the coronavirus pandemic and falling oil prices, the market had fallen by 25%. On the assumption that the dividend yield and the dividend growth rate did not alter over this period

what change in the cost of the Australian equity capital would induce this drop in share prices of 25%?

Answer rating: 100% (QA)

To determine the change in the cost of Australian equity capital that would induce a 25 drop in shar... View the full answer