3) Problem 10-6. Cost of common equity
The earnings, dividends, and common stock price of Carpetto Technologies Inc. are expected to grow at 7% per year in the future. Carpetto's common stock sells for $23.00 per share, its last dividend was $2.00, and it will pay a dividend of $2.14 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. If the firm's bonds earn a return of 12%, what will rs be based on the bond-yield-plus-risk-premium approach, using the midpoint of the risk premium range as suggested in studies?
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?
Other Requirements: Show work on all three questions!!