a). According to DCF;
Cost of Common Equity = [D1 / P0] + g
= [$2.60 / $23.50] + 0.04 = 0.1106 + 0.04 = 0.1506, or 15.06%
b). According to the CAPM,
Cost of Common Equity = Risk-free Rate + [Beta * (Market Return - Risk-free Rate)]
= 3% + [2.10 * (13% - 3%)] = 3% + 21% = 24%
c). Assume Risk premium range is 3%-5%
So, Average Risk Premium = [3% + 5%] / 2 = 8% / 2 = 4%
Cost of Common Equity = Bond's Return + Average Risk Premium
= 10% + 4% = 14%
d). Cost of Common Equity = [15.06% + 24% + 14%] / 3 = 53.06% / 3 = 17.69%
Problem 10-6 Cost of Common Equity The future earnings, dividends, and common stock price of Callahan...
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