COst OF COMMON eQUItY The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 6% per year. Callahans common stock currently sells for $22.00 per share, its last dividend was $2.00, and it will pay a $2.12 dividend at the end of the current year.

a. Using the DCF approach, what is its cost of common equity? b. If the firms beta is 1.2, the risk-free rate is 6%, and the average return on the market is 13%, what will be the firms cost of common equity using the CAPM approach?

c. If the firms 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.

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

10-5 The WACC is a weighted average of the costs of debt, preferred stock, and common equity. Would the WACC be different if the equity for the coming year came solely in the form of retained earnings versus some equity from the sale of new common stock? Would the cal-culated WACC depend in any way on the size of the capital budget? How might dividend policy affect the WACC?