COST OF COMMON EQUITY an Technologies Inc. The future earnings, dividends, and c

Question

COST OF COMMON EQUITY an Technologies Inc. The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 6% per year. Callahan's common stock currently sells for22.25 per share; its last dividend was1.50; and it will pay a $1.59 dividend at the end the current year. e. Using the DCF approach, what is its cost of common equity? Round your answer to two decimal places. Do not round your intermediete calculations. b. If the firm's beta is 0.80, 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. e. If the firm's bonds eam e retum of B% based on the bond yield plus risk premium approach what will be s? Use the midpoint of the risk premium range d scussed in Section 10-5 n your calculations. Round your answer to two decimal ple es. d. If you have equal confidence in used for ny? Round your a to two decimal places. Do not your intermediate calculations.

Explanation / Answer

a)

price = dividend next year /(required rate of return - growth rate)

22.25 = 1.59/cost of common stock - 6%

=>

cost of common stock = 13.15%

b)

expected return = risk free rate + beta * (market return - risk free rate)

cost of common stock = 4% + 0.8 * (12% - 4%)

= 10.4%

c)

cost of common stock = 8% + (12%-4%) = 16%

d)

cost of common stock = (13.15% + 10.4% + 16%)/3

= 13.18%

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