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’s beta = 0.60 Risk-free rate = 6% Average return on market = 13% Firm’s Cost of common equity (according to CAPM) = [Rf + b (RM – Rf)] Firm’s Cost of common equity (Re) = [0.06 + 0.60 (0.13 – 0.06)] Firm’s Cost of common equity (Re) = [0.06 + 0.042] Firm’s Cost of common equity (Re) =0.102 (or) 10.2% Firm’s Cost of common equity (Re) = 10.20% (c) Bond Yield = 11% Yield plus risk premium approach = [(13% - 6%) + 11%] Yield plus risk premium approach = [7% + 11%] Yield plus risk premium approach = 18% If you have equal faith in them all the answer is the average of the 3 (18+10.20+13.84)/3 = 14.0133%

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