Problem: 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 $23 per share, its last dividend was $2.00 and the company pays a dividend of $2.14 at the end of the current year.
1) Using the discounted cash flow approach what is the 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 be 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.
4) On the basis of the results of parts a through c, what would you estimate Carpetto's cost of equity to be?