Question

Cost of Common Equity

The future earnings, dividends, and common stock price of Carpetto Technologies Inc. are expected to grow 4% per year. Carpetto's common stock currently sells for $25.50 per share; its last dividend was $2.00; and it will pay a $2.08 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 1.30, the risk-free rate is 3%, 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 9%, based on the
bond-yield-plus-risk-premium approach, what will be r
_{s}? 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.

Answer #1

Answer a.

Cost of Common Equity = Expected Dividend / Current Price +
Growth Rate

Cost of Common Equity = $2.08 / $25.50 + 0.04

Cost of Common Equity = 0.0816 + 0.0400

Cost of Common Equity = 0.1216 or 12.16%

Answer b.

Cost of Common Equity = Risk-free Rate + Beta * (Return on
Market - Risk-free Rate)

Cost of Common Equity = 3.00% + 1.30 * (12.00% - 3.00%)

Cost of Common Equity = 3.00% + 1.30 * 9.00%

Cost of Common Equity = 14.70%

Answer c.

Risk premium range is 3.00% to 5.00%. Midpoint of risk premium range is 4.00%

Cost of Common Equity = Bond Yield + Risk Premium

Cost of Common Equity = 9.00% + 4.00%

Cost of Common Equity = 13.00%

Answer d.

Estimated Cost of Common Equity = Average of Cost of Common
Equity under 3 different methods

Estimated Cost of Common Equity = (12.16% + 14.70% + 13.00%) /
3

Estimated Cost of Common Equity = 39.86% / 3

Estimated Cost of Common Equity = 13.29%

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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 $23.00 per share; its
last dividend was $1.50; and it will pay a $1.59 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. Do not round your intermediate
calculations.
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If the firm's beta...

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Callahan Technologies Inc. are expected to grow 5% per year.
Callahan's common stock currently sells for $27.25 per share; its
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end of the current year.
Using the DCF approach, what is its cost of common equity?
Round your answer to two decimal places. Do not round your
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%
If the firm's beta...

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per year. Callahan's common stock currently sells for $28.25 per
share; its last dividend was $1.50; and it will pay a $1.59
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
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firm's beta...

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The future earnings, dividends, and common stock price of
Callahan Technologies Inc. are expected to grow 8% per year.
Callahan's common stock currently sells for $25.00 per share; its
last dividend was $2.00; and it will pay a $2.16 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. Do not round your
intermediate calculations.
%
If the firm's beta...

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end of the current year.
Using the DCF approach, what is its cost of common equity?
Round your answer to two decimal places. Do not round your
intermediate calculations.
%
If the firm's beta is 1.30, the risk-free...

The future earnings, dividends, and common stock price of
Callahan Technologies Inc. are expected to grow 8% per year.
Callahan's common stock currently sells for $24.00 per share; its
last dividend was $2.00; and it will pay a $2.16 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. Do not round your
intermediate calculations.
%
If the firm's beta is 1.70, the risk-free...

The future earnings, dividends, and common stock price of
Callahan Technologies Inc. are expected to grow 4% per year.
Callahan's common stock currently sells for $27.50 per share; its
last dividend was $1.50; and it will pay a $1.56 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. Do not round your intermediate
calculations.
If the firm's beta is 1.60, the risk-free rate...

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Callahan Technologies Inc. are expected to grow 5% per year.
Callahan's common stock currently sells for $24.00 per share; its
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end of the current year.
Using the DCF approach, what is its cost of common equity? Round
your answer to two decimal places. Do not round your intermediate
calculations. %
If the firm's beta is 1.00, the risk-free...

The future earnings, dividends, and common stock price of
Callahan Technologies Inc. are expected to grow 5% per year.
Callahan's common stock currently sells for $26.00 per share; its
last dividend was $1.60; and it will pay a $1.68 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. Do not round your
intermediate calculations.
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your answer to two decimal places. Do not round your intermediate
calculations.
If the firm's beta is 1.20, the risk-free rate...

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