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. If the firm's beta is 1.3, the risk-free rate is 9.5%, and the average return on the market is 13%, what will be the firm's cost of common equity using the CAPM approach?

Question

Business

Johnston

21 January, 00:08

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. If the firm's beta is 1.3, the risk-free rate is 9.5%, and the average return on the market is 13%, what will be the firm's cost of common equity using the CAPM approach?

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Seamus Briggs · Answer 1

14.05%

Explanation:

Given that,

Beta = 1.3

Risk-free rate (Rf) = 9.5%

Return on the Market (RM) = 13%

According to CAPM approach:

Cost of common equity (RE):

= [Rf + β (RM - Rf) ]

= [9.5% + 1.3 (13% - 9.5%) ]

= [9.5% + 1.3 (3.5%) ]

= [0.095 + 1.3 (0.035) ]

= [0.095 + 0.0455]

= 0.1405

= 14.05%

Therefore, the firm's cost of common equity is 14.05%.