Cost of Equity. Bunkhouse Electronics is a recently incorporated firm that makes electronic entertainment systems. Its earnings and dividends have been growing at a rate of 30 percent, and the current dividend yield is 2 percent. Its beta is 1.2, the market risk premium is 8 percent, and the risk-free rate is 4 percent.

a. Calculate two estimates of the firm’s cost of equity.

b. Which estimate seems more reasonable to you? Why?