The future earnings, dividends, and common stock price of Callahan Technologies Inc. are expected to grow 5% per year. Callahan's common stock currently sells for $20.50 per share; its last dividend was $2.20; and it will pay a $2.31 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 1.2, the risk-free rate is 6%, 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 11%, 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 Callahan's cost of common equity?