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.
a, Cost of equity using DCF = Dividend Next Year/Price + Growth
= 2.60/21 + 4% = 16.381% or 16.38%
b. CAPM method Cost of Equity = Risk Free rate + Beta*(Market
Return - Risk Free Rate) = 5%+2*(14%-5%) = 23%
c. As per the book the midpoint is 4% (Range is 3%-5%)
Bond Yield + Risk Premium = 9% +4% = 13%
d. Equal confidence in the inputs of three approaches =
(16.381%+23%+13%)/3 =17.46%
Cost of Common Equity The future earnings, dividends, and common stock price of Callahan Technologies Inc....
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