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COST OF COMMON EQUITY The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 6% per year. Callahan’s 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 firm's beta is 1-2, the risk-free rate is 6%, 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 11%, 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 Callahan’s cost of common equity?

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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

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Chapter 10, Problem 6P
Textbook Problem

COST OF COMMON EQUITY The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 6% per year. Callahan’s 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.

  1. a. Using the DCF approach, what is its cost of common equity?
  2. b. If the firm's beta is 1-2, the risk-free rate is 6%, 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. If the firm’s 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.
  4. d. If you have equal confidence in the inputs used for the three approaches, what is your estimate of Callahan’s cost of common equity?

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Chapter 10 Solutions

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