1110 Cost of Equity

The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 7% per year in the future. Shelbys common stock sells for $23 per share, its last dividend was $2.00, and the company will pay a dividend of $2.14 at the end of the current year.

a. Using the discounted cash flow approach, what is its cost of equity?

b. If the firms beta is 1.6, the risk-free rate is 9%, and the expected return on the market is 13%, then what would be the firms cost of equity based on the CAPM approach?

c. If the firms bonds earn a return of 12%, then what would be your estimate of rs using the own-bond-yield-plus-judgmental-risk-premium approach? (Hint: Use the midpoint of the risk premium range.)

d. On the basis of the results of parts a through c, what would be your estimate of Shelbys cost of equity?

Please fill in the blank cells in excel and show work. Thank you!

A B D E F 2 OUTPUT - COST OF EQUITY DCF model CAPM Bond yield + judg. RP 5 1 Problem 11-10 2 3 INPUT 4 Growth rate 5 Share price 6 Last dividend 7 Next dividend 8 Beta 9 Risk-free rate 10 Expected return on the market 11 Before-tax bond yield 12 Judgmental risk premium (midpt) 13 7.0% 23.00 2.00 2.14 $ $ $ 1 B 1.60 Average cost of equity 9.0% 13.0% 12.0% w N 14 15