Requirement (a) – Cost of Common Equity using DCF Approach
Dividend in year 1 (D1) = $1.59 per share
Current selling price per share (P0) = $28.25 per share
Dividend growth Rate (g) = 6.00% per year
Therefore, the Cost of Common Equity = [D1 / P0] + g
= [$1.59 / $28.25] + 0.06
= 0.0563 + 0.06
= 0.1163 or
= 11.63%
Requirement (b) – Cost of Common Equity using CAPM Approach
Cost of Common Equity using CAPM Approach = Risk-free Rate + Beta(Market Rate of Return – Risk-free Rate)
= Rf + Beta[Rm – Rf]
= 4.00% + 0.90[12.00% -48.00%]
= 4.00% + [0.90 x 8.00%]
= 4.00% + 7.20%
= 11.20%
Requirement (c) – Cost of Common Equity Bond Yield Risk Premium Approach
The appropriate risk premium discussed in section 10-5 is from 3% to 5%. Therefore, the mid-point of the range is 4%
Therefore, The Cost of Common Equity Bond Yield Risk Premium Approach = Return of the Bond + Mid-point of the range
= 9.00% + 4.00%
= 13.00%
Requirement (d) – Cost of common equity using equal confidence
Using Equal Confidence, the cost of common equity would be the average of the cost of common equity calculated under the above 3 alternatives,
Cost of Common Equity = [11.63% + 11.20% + 13.00%] / 3
= 35.83% / 3
= 11.94%
6. Problem 10.06 Click here to read the eBook: The Cost of Retained Earnings, is Problem...
6. Problem 10.06 Click here to read the eBook: The Cost of Retained Earnings, is Problem Walk-Through COST OF COMMON EQUITY The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 5% per year. Callahan's common stock currently sells for $24.50 per share; its last dividend was $2.40; and it will pay a $2.52 dividend at the end of the current year. a. Using the DCF approach, what is its cost of common equity?...
5. Problem 10.06 (Cost of Common Equity) eBook Problem Walk-Through The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 7% per year. Callahan's common stock currently sells for $24.00 per share: its last dividend was $2.00; and it will pay a $2.14 dividend at the end of the current year. a. Using the DCF approach, what is its cost of common equity? Do not round Intermediate calculations. Round your answer to two decimal...
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eBook Problem Walk-Through The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 8% per year. Callahan's common stock currently sells for $28.25 per share; its last dividend was $2.50; and it will pay a $2.70 dividend at the end of the current year. Using the DCF approach, what is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. % If the firm's beta is 1.4,...
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Problem Walk-Through Problem 10-6 Cost of Common Equity The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 7% per year. Callahan's common stoc currently sells for $26.00 per share; its last dividend was $2.00; and it will pay a $2.14 dividend at the end of the current year. a. Using the DCF approach, what is its cost of common equity? Round your answer to two decimal places. Do not round your intermediate calculations....
COST OF COMMON EQUITY The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 4% per year. Callahan's common stock currently sells for $29.50 per share; its last dividend was $1.50; and it will pay a $1.56 dividend at the end of the current year. Using the DCF approach, what is its cost of common equity? Round your answer to two decimal places. Do not round your intermediate calculations. If the firm's beta is...
Cost of Common Equity The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 4% per year. Callahan's common stock currently sells for $21.00 per share; its last dividend was $2.50; and it will pay a $2.60 dividend at the end of the current year. Using the DCF approach, what is its cost of common equity? Round your answer to two decimal places. Do not round your intermediate calculations. % If the firm's beta...