Calculate the Cost of Capital for Ordinary Shares of Excellent Ltd: A Step-by-Step Guide

The cost of capital for ordinary shares can be calculated using the Capital Asset Pricing Model (CAPM) formula:

Cost of equity = Risk-free rate + Beta x (Expected market return - Risk-free rate)

Where:

Risk-free rate = 3% (assumed) Beta = 1.2 (assumed) Expected market return = 10% (assumed)

Therefore,

Cost of equity = 3% + 1.2 x (10% - 3%) Cost of equity = 3% + 1.2 x 7% Cost of equity = 11.4%

Alternatively, the cost of equity can also be calculated using the Dividend Growth Model (DGM) formula:

Cost of equity = (Dividend per share / Market price per share) + Expected dividend growth rate

Where:

Dividend per share = $0.2 (given) Market price per share = $4 (calculated as market value of issued share capital / number of ordinary shares) Expected dividend growth rate = 8% (given)

Therefore,

Market price per share = $16,000,000 / 4,000,000 Market price per share = $4

Cost of equity = ($0.2 / $4) + 8% Cost of equity = 5% + 8% Cost of equity = 13%

However, since the CAPM method is more widely used and considered more accurate, the cost of equity is 11.4%.