1. The current risk-free rate of return is 4.20% and the current market risk premium is 6.60%. Fuzzy Button Clothing Company has a beta of 1.56. Using the Capital Asset Pricing Model (CAPM) approach, what is Fuzzy Button’s cost of equity?
2. Green Caterpillar Garden Supplies Inc. is closely held and, as a result, cannot generate reliable inputs for the CAPM approach. Green Caterpillar’s bonds yield 10.20%, and the firm’s analysts estimate that the firm’s risk premium on its stock relative to its bonds is 4.50%. Using the Bond-Yield-plus-Risk-Premium approach, what is the firm’s cost of equity?
3. The stock of Blue Hamster Manufacturing Inc. is currently selling for $45.56, and the firm expects its dividend to be $2.35 in one year. Analysts project the firm’s growth rate to be constant at 7.20%. Using the discounted cash flow (DCF) approach, Blue Hamster’s cost of equity is estimated to be what?