1) Company ABC has a beta of 1.5. The current stock market risk premium is 8%, the 10-year U.S. Treasury bond has a yield of 3%. According to CAPM, what is the cost of common equity (without floatation cost) for company ABC?

2) Company CDEs common stock is currently traded at $40 a share. It is expected to distribute a dividend of $2 a share next year. The average yield to maturity of bonds issued by CDE is 8%. Assume that the CDEs common stock has a risk premium of 4% relative to its yields. What is the implied growth rate of dividends expected by market investors?

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