Calculating cost of equity, cost of retained earnings based on discounted cash flow, C A P M and Bond cost plus premium methods.
The carnings, dividends, and stock price of talukdar Technologies, Inc., are expected to grow at a rate of 7 percent per year in the future. Talukdar'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 this company's cost of retained earnings?
b. If the firm's beta is 1.6, the risk-free rate is 9 percent, and the average 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 k, be, as calculated using the bond-yield-plus-risk-premium approach? (Hint: Use the midpoint of the risk premium range discussed in the text.)
d. Based on the results of parts (a) through (c), what would you estimate Talukdar's cost of retained carnings to be?