Individual Cost Of CapitalCommon Stocks(Part1of2)
There are two means of getting finance from common stocks namely:
 Retained earnings or internal common equity(Ke)
 External common equity (Kne) the issuance of NEW common stocks.
Let’s see how we can compute the aforesaid’s cost of capital
Methods To Compute Of Cost Of INTERNAL Common Equity

Dividend Growth Model
Where Po = price of the stock today D1= dividend at the end of the first year Ke= required rate of return on equity g = constant growth rate of dividends If dividends are paid at a constant annual rate of growth(g) which is less than Ke: Ke= Dividend in year 1/Market price + Annual growth rate in dividends Therefore Ke(Required rate of return)= D1/Po + g 
Illustration Using the DIVIDEND GROWTH MODEL BASIS Company XYZ Ltd’s recently received $0.15 dividend per share and expect dividends to growth at an annual rate of 10%. The market price of the security is $3, compute the investors’ required rate of return using the Dividend Growth Model: Suggested Solution: Ke( Required rate of return) = D1/Po + g = $0.15(1+0.1) / $3 + 0.1 = $0.165/3+0.1 =0.155 =15.5% 
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