Problem: The earnings, dividends, and stock price of Carpetto Technologies Inc are expected to grow at 7 percent per year in the future. Carpetto's common stock sells for $ 23 per share, its last dividend was $ 2, and the company will pay a dividend of $ 2.14 at the end of the current year.
1) Using the discounted cash flow approach, what is its cost of equity?
2) If the firm's beta is 1.6, the risk free rate is 9%, and the expected return on the market is 13%, what will the firm's cost of equity using the CAPM approach?
3) If the firm's bonds earn a return of 12%, what will rs be using the bond-yield-plus-risk-premium approach? (Hint: Use the midpoint of the risk premium range.)
4) On the basis of the results of parts a through c, what would you estimate Carpetto's cost of equity be?