DISCUSS the dividend-price approach, and earnings price approach to estimate cost of equity capital.

In dividend price approach, cost of equity capital is computed by dividing the current dividend by average market price per share. This ratio expresses the cost of equity capital in relation to what yield the company should pay to attract investors. It is computed as: Kₑ = D₁ / P₀ Where, D₁ = Dividend per share in period 1 P₀ = Market price per share today Whereas, on the other hand, the advocates of earnings price approach co-relate the earnings of the company with the market price of its share. Accordingly, the cost of ordinary share capital would be based upon the expected rate of earnings of a company. This approach is similar to dividend price approach, only it seeks to nullify the effect of changes in dividend policy.