Question

10-6 COST OF COMMON EQUITY 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 for $22.00 per share; its last dividend was $2.00; and it will pay a $2.12 dividend at the end of the current year.

a. Using the DCF approach, what is its cost of common equity?

b. If the firm's beta is 1.2, 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?

c. If the firm's bonds earn a return of 11% used 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.

d. If you have equal confidence in the inputs used for the tree approaches, what is your estimate of Callahans cost of common equity?

Answer 1

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