The future earnings, dividends, and common stock price ofCallahan Technologies Inc. are expected to grow 6% per year. Callahan’s common stockcurrently sells for $22.00 per share, its last dividend was $2.00, and it will pay a $2.12 dividendat 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 is13%, 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? d. If you have equal confidence in the inputs used for the three approaches, what is yourestimate of Callahan’s cost of common equity?
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
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 $22.00 per share, its last dividend was $2.00, and it will pay a $2.12 dividend
at the end of the current year.
a. Using the DCF approach, what is its
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
c. If the firm’s bonds earn a return of 11%, based on the bond-yield-plus-risk-premium approach, what will be rs?
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?
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