Problem:
The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 7% per year in the future. Shelby's common stock sells for $23 per share, its last dividend was $2.00, and the company will pay a dividend of $2.14 at the end of the current year.
Required:
Question 1: Using the discounted cash flow approach, what is its cost of equity?
Question 2: If the firm's beta is 1.6, the risk free rate is 9%, and the expected return on the market is 13%, what will be the firm's cost of equity using the CAPM approach?
Question 3: If the firm's bonds earn a return of 12%, what will rs be using the bond-yield-plus-risk-premium approach? (Hint: Use the midpoint of the risk premium range.)
Question 4: On the basis of the results of parts a through c, what would you estimate Shelby's cost of equity to be?
Note: Please provide step by step solution.