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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
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 $25.00 per share; its last dividend was $2.00; and it will pay a $2.08 dividend at the end of the current year. a. Using the DCF approach, what is its cost of common equity? 12.06 % b. If the firm's beta is 0.90, 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? 11.10 % c. 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. % 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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