Cost of Equity
The earnings, dividends, and common stock price of Shelby Inc. are expected to grow at 5% per year in the future. Shelby's common stock sells for $24.50 per share, its last dividend was $2.00, and the company will pay a dividend of $2.10 at the end of the current year.
1. Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places. %
2. If the firm's beta is 2.2, the risk-free rate is 8%, and the expected return on the market is 14%, then what would be the firm's cost of equity based on the CAPM approach? Round your answer to two decimal places. %
3. If the firm's bonds earn a return of 8%, and analysts estimate the market risk premium is 3 to 5 percent, then what would be your estimate of rs using the over-own-bond-yield-plus-judgmental-risk-premium approach? Round your answer to two decimal places. (Hint: Use the midpoint of the risk premium range). %
4. On the basis of the results of parts a through c, what would be your estimate of Shelby's cost of equity? Assume Shelby values each approach equally. Round your answer to two decimal places. %