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9. Given this information: • Beta: 1.6 • Market risk premium 8%• Risk free rate: 3% • Dividends expected to grow 4% per year •Last dividend: 2 EUR • Equity selling at 17.5 a) What is theexpected cost of equity using the CAPM?

b) What is the expected cost of equity using the dividend growthmodel?

c) Is there any difference between them? And if risk free ratedecrease by 1%?

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Jamar Ferry
Jamar FerryLv2
28 Sep 2019

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The future earnings, dividends, and common stock price of Carpetto Technologies Inc. are expected to grow 7% per year. Carpetto's common stock currently sells for $23.00 per share; its last dividend was $2.00, and it will pay a $2.14 dividend at the end of the current year.

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b) 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?

c) If the firm's bonds earn a return of 12%, based on the bond-yield-plus-risk-premium approach, what will be rs? Use the midpoint of the risk premium range discussed in Section 10-5 in your calculations.

d) If you have equal confidence in the inputs used for the three approaches, what is your estimate of Carpetto's cost of common equity?

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a. Using the discounted cash flow approach, what is the cost of equity?

b. If the firm's beta is 1.6, the risk-free rate is 9%, and the expected return on the market is 13%, then what would be the firm's cost of equity based on the CAPM approach?

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2. You are given the following information concerning Around Town Tours:

· Debt: 8,500 shares, 7.1 percent coupon bonds outstanding, with 14 years to maturity and a price of $1,026. Bonds pay interest semiannually.

· Common stock: 265,000 shares selling for $76 per share; stock beta is 0.92 and will pay dividend of $2.48 next year. The dividend is expected to grow by 4 percent per year indefinitely

· Preferred stock: 7,500 shares, 6 percent dividend, selling at $88 per share.

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a. What is the cost of equity using CAPM? What is cost of equity using dividend growth model? What is your estimate of the cost of equity, based on the above results?

b. What is before tax cost of debt? What is after-tax cost of debt?

c. What is cost of preferred stock?

d. What are the firm❝s capital structure weights of equity, debt, and preferred stock?

e. Calculate the WACC for this firm.

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