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Earnings Yield approach to Cost of Equity is:
AEPS / Market Price
BDividend / EPS
CD/P + g
DEPS × P/E
Answer & Solution
Correct answer: A. EPS / Market Price
1. Earnings Yield Approach: Ke = EPS / Market Price per share.
2. Assumes the entire EPS is the return demanded by equity holders.
3. Limited by ignoring growth and retention.
_Source: ICAI BoS CA Inter Paper 6A, Ch 4 "Cost of Capital", §7_
Related questions
The Realised Yield Approach to Cost of Equity assumes:Risk-free rate 5%, market premium 8%, beta 1.2. Required equity return under CAPM is:When a firm issues new equity, Cost of New Equity is:Risk-free rate is 6%, market return is 14%, and the stock's beta is 1.5. CAPM cost of equiUnder CAPM, Cost of Equity equals:According to the Dividend Price Approach, Cost of Equity (Ke) equals: