Question
The future earnings, dividends, and common stock price of Callahan Tech Inc. are expected to grow 6% per year. Callahans common stock currently sells for
The future earnings, dividends, and common stock price of Callahan Tech Inc. are expected to grow 6% per year. Callahans common stock currently sells for $22/share, its last dividend was $2; and it will pay a $2.12 dividend at the end of the current year (same as early next year this is your D1).
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?
If the firms bonds earn a return of 11%, based on the bond-yield- plus-premium approach, what will be the cost of common equity? (Use the mid-point range for risk premium. That is the risk premium is 4%, which is in the middle of the range of risk premium going from 3% - 5%)
If you have equal confidence in the inputs used for the three approaches, what is your estimate for Callahans cost of common equity?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started