Finding the cost of common equity using the CAPM approach

flora33

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Mar 10, 2008
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The earnings, dividends, and common stock price of Carpetto Technologies Inc. are expected to grow at 7 percent per year in the future. Carpetto's common stock sells for $23 per share, its last dividend was $2.00, and it will pay a dividend of $2.14 at the end of the current year.

If the firm's beta is 1.6, the risk-free rate is 9 percent, and the average return on the market is 13 percent, what will be the firm's cost of common equity using the CAPM approach?

Using the formula: rs = rRF + (rM - rRF)bi from my text book, I got the following answer:

9% + 4% (1.6) = 15.4% cost of common equity

Is this correct? Am I missing anything here?

Thanks
Flora
 
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