Question

Cost of Equity

The earnings, dividends, and common stock price of Shelby Inc. are expected to grow at 6% per year in the future. Shelby's common stock sells for $21.00 per share, its last dividend was $2.00, and the company will pay a dividend of $2.12 at the end of the current year.

Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places.
%
If the firm's beta is 1.5, the risk-free rate is 8%, 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.
%
If the firm's bonds earn a return of 10%, and analysts estimate the market risk premium is 3 to 5 percent, 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).
%
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.
%

Answer 1

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