## Cost of Equity: Dividend Price and Earnings Price Approaches
These are the simplest methods for estimating the cost of equity, suited to companies with stable (non-growing) dividends or earnings.
---
### 1. Dividend Price (D/P) Approach
Assumes the company pays a constant dividend forever (like a perpetuity).
```
Ke = D / P0
```
Where:
- `D` = Annual dividend per share (constant)
- `P0` = Current market price per share
Rearranged for price:
```
P0 = D / Ke
```
---
### 2. Earnings Price (E/P) Approach
Used when a company pays out all earnings as dividends (100% payout). Earnings per share proxies for the dividend.
```
Ke = EPS / P0
```
Note: This is equivalent to the inverse of the P/E ratio: Ke = 1/(P/E ratio)
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### Limitations
- Both assume zero growth — unsuitable for growing companies
- D/P ignores retained earnings and capital gains
- E/P is only valid when payout ratio = 100%