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Cost of Equity

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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.

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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?

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The solution explains the calculation of cost of equity using different methods.

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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?

The cost of equity is given as rs= D1/P + ...

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