1.

Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: r_RF = 4.10%; RP_M = 5.25%; and b = 1.65. Based on the CAPM approach, what is the cost of equity from retained earnings?

2.

The CFO of Lenox Industries hired you as a consultant to help estimate its cost of capital. You have obtained the following data: (1) r_d = yield on the firms bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) r_RF = 5.00%, RP_M = 6.00%, and b = 1.40. (3) D₁ = $1.20, P₀ = $35.00, and g = 8.00% (constant). You were asked to estimate the cost of equity based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference?

3.

S. Bouchard and Company hired you as a consultant to help estimate its cost of capital. You have obtained the following data: D₀ = $0.85; P₀ = $22.00; and g = 6.00% (constant). The CEO thinks, however, that the stock price is temporarily depressed, and that it will soon rise to $48.00. Based on the DCF approach, by how much would the cost of equity from retained earnings change if the stock price changes as the CEO expects?