The earnings, dividends, and common stock price of Carpetto Technologies Inc. ar

Question

The earnings, dividends, and common stock price of Carpetto Technologies Inc. are expected to grow at 8% per year in the future. Carpetto's common stock sells for $27.75 per share, its last dividend was $1.50, and it will pay a dividend of $1.62 at the end of the current year.

a. Using the DCF approach, what is its cost of common equity? Round your answer to two decimal places.
_____%

b. If the firm's beta is 0.60, the risk-free rate is 6%, and the average return on the market is 13%, what will be the firm's cost of common equity using the CAPM approach? Round your answer to two decimal places.
____ %

c. If the firm's bonds earn a return of 11%, what will rs be based on the bond-yield-plus-risk-premium approach, using the midpoint of the risk premium range as suggested in studies? Round your answer to two decimal places.
____ %

d. Assuming 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

These answers from the previous are all correct (so I won't redo them)

Dividend growth rate = 8% per year
Common stock selling price = $27.75 per share
Last dividend (D0) = $1.50
Next dividend (D1) = $1.62
(a) Cost of Common Equity (Re) = [D1 / P0] + g
Cost of Common Equity (Re) = [$1.62 / $27.75] + 0.08
Cost of Common Equity (Re) = 0.1384 (or) 13.84%
Cost of Common Equity (Re) = 13.84%
(b) Firm

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