COST OF COMMON EQUITY The future earnings, dividends, and common stock price of Carpetto Technologies Inc. are expected to grow 7% per year. Carpetto’s common stock currently sells for $23 00 per share; its last dividend was $2 00; and it will pay a $2 14 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 6, the risk-free rate is 9%, 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 12%, 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.

d. If you have equal confidence in the inputs used for the three approaches, what is your estimate of Carpetto’s cost of common equity?

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