Problem: The earning, dividends, and stock price of Carpetto Technologies Inc. are expected to grow at 7 percent per year in the future. Carpetto common stock sells for $23 per share, its last dividend was $2.00, and the company will be a dividend of $2.14 a 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 CAPM approach?
C. If the firm’s bonds earn a return of 12 percent, what will rs be using the bond yield plus risk premiums approach? (Hint: Use the midpoint of the risk premium range).
D. On the basis of the results of the parts A through C, what would you estimate Carpetto’s cost of equity to be?