Cost of Common Equity The future earnings, dividends, and common stock price of
ID: 2766017 • Letter: C
Question
Cost of Common Equity
The future earnings, dividends, and common stock price of Carpetto Technologies Inc. are expected to grow 6% per year. Carpetto's common stock currently sells for $23.50 per share; its last dividend was $2.00; and it will pay a $2.12 dividend at the end of the current year.
Using the DCF approach, what is its cost of common equity? Round your answer to two decimal places.
%
If the firm's beta is 1.60, the risk-free rate is 7%, and the average return on the market is 12%, what will be the firm's cost of common equity using the CAPM approach? Round your answer to two decimal places.
%
If the firm's bonds earn a return of 11%, based on the bond-yield-plus-risk-premium approach, what will be rs? Use the midpoint of the risk premium range discussed in Section 10-5 in your calculations. Round your answer to two decimal places.
%
If you have equal confidence in the inputs used for the three approaches, what is your estimate of Carpetto's cost of common equity? Round your answer to two decimal places.
%
Explanation / Answer
1.
price of the stock=D/(K-g) $23.50=$2.12/(K-0.06)
K-0.06=$2.12/$23.50=0.09
K=0.09+0.06=0.15=15%
2.
firm's cost of common equity using the CAPM approach=7%+1.6(12%-7%)=7%+8%=15%
3.