In: Finance
The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 6% per year. Callahan's common stock currently sells for $29.50 per share; its last dividend was $2.50; and it will pay a $2.65 dividend at the end of the current year.
Answer a.
Expected Dividend = $2.65
Current Price = $29.50
Growth Rate = 6.00%
Cost of Common Equity = Expected Dividend / Current Price +
Growth Rate
Cost of Common Equity = $2.65 / $29.50 + 0.06
Cost of Common Equity = 0.0898 + 0.0600
Cost of Common Equity = 0.1498 or 14.98%
Answer b.
Risk-free Rate = 3.00%
Beta = 0.70
Market Return = 12.00%
Cost of Common Equity = Risk-free Rate + Beta * (Market Return -
Risk-free Rate)
Cost of Common Equity = 3.00% + 0.70 * (12.00% - 3.00%)
Cost of Common Equity = 3.00% + 0.70 * 9.00%
Cost of Common Equity = 9.30%
Answer c.
Bond Yield = 11.00%
Risk Premium is midpoint of the range of risk premium (assuming 3% to 5%). So, midpoint is 4%
Cost of Common Equity = Bond Yield + Risk Premium
Cost of Common Equity = 11.00% + 4.00%
Cost of Common Equity = 15.00%
Answer d.
Estimated Cost of Common Equity = Average of Cost of Common
Equity
Estimated Cost of Common Equity = (14.98% + 9.30% + 15.00%) /
3
Estimated Cost of Common Equity = 39.28% / 3
Estimated Cost of Common Equity = 13.09%