The earnings, dividends, and common stock price of CarpettoTechnologie

QUESTION

The earnings, dividends, and common stock price of CarpettoTechnologies Inc. are expected to grow at 11 percent per year inthe future. Carpettos common stock sells for $23 per share itslast dividend was $2.00, and it will pay a dividend of $2.14 at theend of the current year.a) Using the DCF approa
Current Price of theStock (P 0 ) = $23 Dividend just paid (D 0 ) =$2 Expected Dividend(D 1 ) =$2.14 Dividend growth rate (g) =11% ( a) CalculatingCost of Common Equity (R E ) using DCFapproach : P 0 = D 1 / (R g) R = (D 1 / P 0 ) g R = ($2.14 / $23) 0.11 R = 0.093 0.11 R = 0.20 (or) 20% Cost of Common Equity(R E ) = 20% Risk-free rate(R f ) = 9% Stock Beta() = 1.6 Average return on the Market(R M ) = 13% (b) Calculating Cost ofCommon equity using CAPM approach: R E = R

f (R M -R f )) R E = 9% 1.6 *(13% 9%) R E = 0.09 1.6* (0.13 0.09) R E = 0.09 1.6* 0.04 R E = 0.09 0.064 R E = 0.154 (or)15.4% Cost of Commonequity (R E ) = 0.154 (or)15.4% ( c) Bond Yield =12% Risk Premium =(R M R f ) Risk Premium = (13% -9%) Risk Premium =4% r s =Bond yield Risk premium r s = 12% 4% r s =16%

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