1. The earnings, dividends and stock price of Sun Co. are expected to grow at 7% a year in the future. Its common stock sells for $23 per share, and its last dividend was $2.

a) using the discounted cas flow approach (Gordon model), what is its cost of common equity ?

b) if the firm's beta is 1.1, the risk free rate is 6%, and the average return on the market is 11%, what will be the firm's cost of common equity using the CAPM approach ?

2. Common stock of MERCO Ltd currently sells for $53. There are 1.5 mln shares outstanding. P/E ratio equals 5.2. Dividend payout ratio (DPS/EPS) remains at constant level of 40%. Merco's earnings are expected to grow at 3% annually. First dividend to be paid is expected in a year. Calculate: a) Merco's EPS; b) its cost of common equity;