7. The earnings, dividends, and common stock price ofCarpetto Technologies Inc.

Question

7.

The earnings, dividends, and common stock price ofCarpetto Technologies Inc. are expected to grow at 7 percent peryear in the future. Carpetto's common stock sells for $23 pershare, its last dividend was $2.00, and it will pay a dividend of$2.14 at the end of the current year.

Using the DCF approach, what is the cost of commonequity? (Points:

8.

The earnings, dividends, and common stock price ofCarpetto Technologies Inc. are expected to grow at 7 percent peryear in the future. Carpetto's common stock sells for $23 pershare, its last dividend was $2.00, and it will pay a dividend of$2.14 at the end of the current year.

If the firm's beta is 1.6, the risk-free rate is 9percent, and the average return on the market is 13 percent, whatwill be the firm's cost of common equity using the CAPMapproach?

9.

The earnings, dividends, and common stock price ofCarpetto Technologies Inc. are expected to grow at 7 percent peryear in the future. Carpetto's common stock sells for $23 pershare, its last dividend was $2.00, and it will pay a dividend of$2.14 at the end of the current year.

If the firm's bonds earn a return of 12 percent,what will rs be based on thebond-yield-plus-risk-premium approach, using the midpoint of therisk premium range?

3. Tapley Inc. recently hired you as aconsultant to estimate the company’s WACC. You haveobtained the following information. (1) Tapley's bondsmature in 25 years, have a 7.5% annual coupon, a par value of$1,000, and a market price of $936.49. (2) Thecompany’s tax rate is 40%. (3) The risk-free rate is 6.0%,the market risk premium is 5.0%, and the stock’s beta is1.5.   (4) The target capital structure consists of 30%debt and 70% equity. Tapley uses the CAPM to estimate thecost of equity, and it does not expect to have to issue any newcommon stock. What is its WACC?

(Points: 4)

Explanation / Answer

    Stock Price(P0)                  =    $23

    Last Dividend(D0)              =    $2

     Current Dividend(D1)        =    $2.14

Cost of Common equity (rs)   =  (D1 / P0) + g

                                               =   ($2.14 / $23) + 0.07

                                               =    0.163 (or) 16.3%

(8)Beta (b)   = 1.6

Risk-free rate (rRF)   =   9%

Average return on the market (rM) = 13%

Using CAPM Approach:

Cost of Common equity(rs) = rRF + (rM- rRF)b

                                              = 9% + (13% - 9%) 1.6

                                              = 0.09 + (0.04)1.6

                                              = 0.154(or) 15.4%

(3)Cost of debt (Rd) = 7.5% (1-0.40)

                              = 0.045 (or) 4.5%

Cost of debt (Rd)  = 4.5%

Cost of Equity (Re) = Risk free rate(Rf) + Market risk premium (MRP) *Beta(ß)

                                = 6% + 5% * 1.5

                                = 0.06 + 0.05 *1.5

                                = 0.135 (or) 13.5%

Cost of Equity(Re) = 13.5%

WACC   = (E/V) * Re + (D/V) *Rd

WACC   =   0.70 * 0.135 + 0.30 *0.045

              =    0.0945 + 0.0135

              =    0.108 (or) 10.8%

Weighted Average Cost of Capital (WACC)  = 10.8%

Related Questions

Navigate

• Browse (All)
• Browse 7
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.