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Brut [27]
3 years ago
11

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.
a) Using the DCF approach, what is its cost of common equity ?


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 ?
Business
1 answer:
Galina-37 [17]3 years ago
5 0

Answer:

Dividend growth rate (g) = 7% per year

Common Stock value (P0) = $23 per share

Dividend just paid (or) Last dividend (D0) = $2

Current year dividend to pay (D1) = $2.14

(a) Using the DCF approach, what is its cost of common equity?

Cost of Common Equity (R) = [D1 / P0] +g

Cost of Common Equity (R) = [$2.14 / $23] + 0.07

Cost of Common Equity (R) = 0.1630 (or) 16.30%

Cost of Common Equity (R) = 16.30%

(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?

Beta = 1.6

Risk-free rate (Rf) = 9%

Return on the Market (RM) = 13%

Calculating Firm’s Cost of Common Equity using the CAPM approach:

According to CAPM approach:

Cost of common equity (RE) = [Rf + β (RM – Rf)]

Cost of common equity (RE) = [9% + 1.6 (13% - 9%)]

Cost of common equity (RE) = [9% + 1.6 (4%)]

Cost of common equity (RE) = [0.09 + 1.6 (0.04)]

Cost of common equity (RE) = 0.154 (or) 15.4%

Cost of common equity (RE) = 15.4%

(c) If the firm’s bonds earn a return of 12%, based on the bond-yield-plus-risk-premium approach, what will be rs?

rs= Bond rate + Risk premium

rs= 12% + 4%

rs= 16%

d. The two approaches bond-yield-plus-risk premium approach and CAPM both has lower cost of equity than the DCF method. The firm’s cost of equity estimated to be 15.9% which is the average of all the three methods.

Explanation:

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Answer:

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Answer:

The amount of bad debt expenses for the year 2018 is $38,000

Explanation:

In the given question we have been told that the allowance for bad debts is $8,000 which the uptown travel, Inc has made and also another information that has been given in the question is that the uptown travel Inc uses the aging of account receivable method , this a method where we are calculating the amount of uncollectible  bad debt expenses.

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