Eureka Ltd, is a rapidly growing chain of retail stores. A security analyst's report indicates that debt yielding 8% composes 25% of Eureka's overall capital structure. Furthermore, Eureka's dividends are expected to grow at a rate of 9% per year.
Currently, common stock in the company is priced at $30, and it should pay $1.50 per share in dividends during the coming year. The risk free rate is currently equal to 2% and the expected return on the SP 500 index is 10%. The company's estimated beta is 1.5.
a. Calculate Eureka's cost of equity using dividend growth model
b. Calculate Eureka's cost of equity using the capital asset pricing model
c. Assuming a 40% tax rate, calculate Eureka's weighted average cost of capital.