The future earnings, dividends, and common stock price of Carpetto Technologies

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 $26.25 per share; its last dividend was $1.80; and it will pay a $1.89 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 1.50, the risk-free rate is 8%, 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 11%, 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

Ks= D1/P0+g

=1.89/26.25+0.05

Cost of Equity =16.20%

Ra=Rf+ Beta of Security(Expected Market Return-Risk Free Return)

=0.08+1.50(0.12-0.08)

=14%

Bond Yield Plus Risk Premium

rs= Bond Yield +Risk Premium

=0.11+0.0.04

=0.15

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