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    Cost of equity using several approaches

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    9-8
    The earnings, dividends, and stock price of Carpetto Technologies Inc. are expected to grow at 7% per year in the future. Carpetto's common stock sells for $23 per share, its last dividend was $2.00 and the company pays a dividend of $2.14 at the end of the current year.
    a) Using the discounted cash flow approach what is the cost of equity?
    b) If the firm's beta is 1.6, the risk-free rate is 9%, and the expected return on the market is 13%, what will be the firm's cost of equity using the CAPM approach?
    c) If the firm's bonds earn a return of 12% what will Rs be using the bond yield plus risk premium approach.
    d) On the basis of the results of parts a through c, what would you estimate Carpetto's cost of equity to be?

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    Solution Preview

    A. Using the discounted cash flow approach that is its cost of equity?

    Ke= (DIV1/Po)+g= 16.30%

    Div1= Expected dividend per share next year. 2.140

    P0= Market price =23
    G= growth 7.00%

    b. If the firm's beta is 1.6, the risk free rate is 9 %, and the expected return on the market is 13%, what will be the firm's cost of equity using the CAPM ...

    Solution Summary

    This explains the steps to compute the cost of equity using several approaches

    $2.19

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