Problem:
Stock in Dragula Industries has a beta of 1.8. The market risk premium is 5 percent, and T-bills are currently yielding 4.80 percent. The company's most recent dividend was $2.00 per share, and dividends are expected to grow at a 5.0 percent annual rate indefinitely.
Required:
Question: If the stock sells for $35 per share, what is your best estimate of the company's cost of equity?
Note: Solve the problem and show all work.