The earnings, dividends, and stock price of Carpet to Technologies Inc. are expected to grow at 7 percent per year in the future. Carpetto's common stock sells for $23 per share, its last dividend was $2.00, and the company will pay a dividend of $2.14 at the end of the current year.
a. Using the discounted cash flow approach, what is its cost of equity?
b. If the firm's beta is 1.6, the risk-free rate is 9 percent, and the expected return on the market is 13 percent, what will be the firm's cost of equity using the CAPM approach?
c. If the firm's bonds earn a return of 12 percent, what will rs be using the bond yield- plus-risk-premium approach? (Hint: Use the midpoint of the risk premium range.)
d. On the basis of the results of parts a through c, what would you estimate Carpetto's cost of equity to be?