The future earnings, dividends, and common stock price of Carpetto Technologies
ID: 2763008 • Letter: T
Question
The future earnings, dividends, and common stock price of Carpetto Technologies Inc. are expected to grow 5% per year. Carpetto's common stock currently sells for $27.75 per share; its last dividend was $2.40; and it will pay a $2.52 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 1.10, the risk-free rate is 4%, 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 10%, 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
Answer
Answer 1
The future earnings, dividends, and common stock price of Carpetto Technologies Inc. are expected to grow 5% per year. Carpetto's common stock currently sells for $27.75 per share; its last dividend was $2.40; and it will pay a $2.52 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.
Current market price = Dividend for next year / Cost of capital – Growth rate
27.75 = $ 2.52 / Cost of capital – 0.05
Cost of capital – 0.05 = 2.52 / 27.75
Cost of capital – 0.05 = 0.0908
Cost of capital = 0.0908 + 0.05
Cost of capital = 0.1408
Cost of capital = 14.08%
Answer 2
If the firm's beta is 1.10, the risk-free rate is 4%, 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. %
Cost of Equity = Risk free rate + Beta (Market return – Risk free return)
= 4% + 1.1 (12% - 4%)
= 4% + 1.1 (8%)
= 4% + 8.8%
= 12.8%
Answer 3
If the firm's bonds earn a return of 10%, 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.
Note : Information is missing for this ( Use the midpoint of the risk premium range discussed in Section 10-5 in your calculations).
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.