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 $22.00 per share, its last dividend was $2.40, and the company will pay a dividend of $2.52 at the end of the current year.
a) Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places. _____%
b) If the firm's beta is 2.0, the risk-free rate is 5%, and the expected return on the market is 12%, then what would be the firm's cost of equity based on the CAPM approach? Round your answer to two decimal places.
______%
c) 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).
_____%
d) 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.
____%