1. Sammy is the CEO of Company XYZ. He estimates that the risk premium should be 4.5%. Company XYZ's bonds yield 9.25%. Using the bond-yield-plus-risk-premium approach, what is the firm's cost of equity?
2. Company XYZ's stock sells for $30.00; its next expected dividend is $1.55; and analysts expect its growth rate to be 4.25%. Based on the DCF method, what is the minimum rate of return that should be earned on retained earnings to justify plowing earnings back into the business rather than paying them out to shareholders as dividends?
3. Assume that in today's market, rrf = 4.25%, the market risk premium is RPM = 4%, and Company XYZ's beta is 1.02. Using the CAPM approach, what is Company XYZ's estimated cost of equity?