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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. c If the firm’s bonds earn a return of 12%, 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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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977
BuyFind

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781285867977

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Section
Chapter 10, Problem 6P
Textbook Problem

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.

  1. a. Using the DCF approach, what is its cost of common equity?
  2. 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?
  3. c. 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.
  4. 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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