Yield Risk Premium Approach problem:
The earnings, dividends and stock price of Carpetto Technologies Inc are expected to grow @ 7% 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.
1. If the firm's bonds earn a return of 12 percent what will Rs be using the bond yield-plus-risk premium approach?
2. What would you estimate Carpetto's cost of equity to be?