Question

(4-6) The earnings, dividends, and stock price of Carpetto. Technologies, Inc. are expected to grow at 7% per year in the future. Carpetto's common stock sells for Php 23 per share, its last dividend was PhP 2.00, and the company will pay a dividend of Php 2.14 at the end of the current year. 4. With a DCF method, what is the cost of common equity? a. 16.3% b. 15.7% c. 16.0% d. 15.4% e. None of the Above 5. If the firm's beta is 1.6, the risk-free rate is 9%, and the average return on the market is 13%, what will be the firm's cost of common equity using the CAPM approach? a. 16.3% b. 15.7% c. 16.0% d. 15.4% e. None of the Above 6. If the firm's bond earn a return of 12%, what will ks be using the bond-yield-plus-risk-premium approach? (HINT: Use the midpoint of the risk premium range) a. 16.3% b. 15.7% c. 16.0% d. 15.4% e. None of the Above

Answer 1

solution: 4) Ke = (D1/PO) +g (2.14/23)+0.07 16.3% 5)as per CAPM, cost of equity = risk free rate + beta * (market return-risk free rate) 0.09+1.6*(0.13-0.09) 15.4% 6) AS per bond yield plus risk premium approach** rs= bond yield + risk premium = 0.12+0.04 16.0% **section 10-5 suggest risk premium range from 3 to 5% hence midpoint = 4%