Question

The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 8% per year in the future. Shelby's common stock sells for $23.75 per share, its last dividend was $2.50, and the company will pay a dividend of $2.70 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 2.1, the risk-free rate is 3%, and the expected return on the market is 13%, 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%, then what would be your estimate of r_s 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.

Can you guys show me how to work them out please not just the answer I want to comprehend it. Mostly confused on C. rs= 8% +3% =11 but it's not right please explain why and what numbers are supposed to go there.  

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

ACCORDING TO THE BOOK, THE RISK PREMIUM IS MID POINT OF RISK PREMIUM RANGE. THE BOOK I HAVE IS OF BRIGHAM, STATES THAT RANGE IS 3% TO 5%, SO AVERAGE RISK PREMIUM = 4%

SO FOR BOND YIELD PLUS APPROACH WILL BE CALCULATED AS I HAVE DONE IT IN FOLLOWING IMAGE