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# Cost of common equity explained in this solution

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6. The earnings, dividends, and common stock price of Carpetto 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 it will pay a dividend of \$2.14 at the end of the current year.
Using the DCF approach, what is the cost of common equity?

7.The earnings, dividends, and common stock price of Carpetto 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 it will pay a dividend of \$2.14 at the end of the current year.
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 common equity using the CAPM approach?

8. The earnings, dividends, and common stock price of Carpetto 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 it will pay a dividend of \$2.14 at the end of the current year.
If the firm's bonds earn a return of 12 percent, what will rs be based on the bond-yield-plus-risk-premium approach, using the midpoint of the risk premium range?

9.The earnings, dividends, and common stock price of Carpetto 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 it will pay a dividend of \$2.14 at the end of the current year.
Assuming you have equal confidence in the inputs used for the three approaches, what is your estimate of Carpetto's cost of common equity?

10. Patton Paints Corporation has a target capital structure of 40 percent debt and 60 percent common equity, with no preferred stock. Its before-tax cost of debt is 12 percent, and its marginal tax rate is 40 percent. The current stock price is P0 = \$22.50. The last dividend was D0 = \$2.00, and it is expected to grow at a constant rate of 7 percent. What is its cost of common equity and its WACC?

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6. The earnings, dividends, and common stock price of Carpetto 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 it will pay a dividend of \$2.14 at the end of the current year.
Using the DCF approach, what is the cost of common equity?

Cost of equity = (D1/Po)+G

D1= Expected dividend per share next year= 2.14
P0= Market price =23
G= growth 7.00%

7. 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 ...

#### Solution Summary

Response provides the steps to compute the cost of common equity

\$2.19