Question

please answer all parts

The future caring, dividends, and common stock price of Callahan Technologies Inc. we expected to grow 7 per year Callahan's common stock currently sels for $22-25 per shares last dividend was $2.00and will pay a $2.14 dividend the end of the current year Using the DF pproach, what is the cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places the firm's be 0.8. the r e is and the return on the market is 10 frm's cost of common equity using the CAPM approach? Round your answer to the decimal placu. the firm's bonds earn a return of 12%, based on the bond-yield plus riskpremium approach, what will be 2 Use the midpoint of the risk premium range discussed in Section 10-5 in your calculations. Round your answer to two decimal places you have equal confidence in the inputs used for the three approaches, what is your time of Call Do not round intermediate calculations. Round your answer to two decimal

Answer 1

1]

a]

DCF cost of equity = (next year dividend / current share price) + growth rate

DCF cost of equity = ($2.14 / $22.25) + 0.07

DCF cost of equity = 16.62%

b]

CAPM cost of equity = risk free rate + (beta * (expected market return - risk free rate))

CAPM cost of equity = 7% + (0.8 * (14% - 7%))

CAPM cost of equity = 12.60%

c]

Bond yield-plus-risk premium cost of equity = risk free rate + bond risk premium

The bond risk premium range for this question refers to another Section 10-5, which is not provided in this question. Hence, assume the mid point of the risk premium range is 7%,

Bond yield-plus-risk premium cost of equity = 7% + 7% = 14.00%

d]

Estimated cost of equity = average of three approaches

Estimated cost of equity = (16.62% + 12.60% + 14.00%) = 14.41%