2. Midwest Cable Inc. is a company that provides domestic and international long distance, regional and local communications services, cable (broadband) television, and Internet communications services. For the past two years, it has paid an annual dividend of $2.51 per share; however, the compound rate of growth in dividends per share over the past 10 years has been 7.2 percent. The beta of Midwest Cable stock measured over the past three years is 1.25. Its debt, which makes up 32 percent of total capital, currently yields 7.28 percent, while long term Treasury bonds are yielding 5.50 percent. The market risk premium (geometric) is at 5.9 percent. Midwest shares are currently trading at $45.40 per share.

Calculate Midwest Cable cost of equity using:

a) the Capital Asset Pricing Model (CAPM), and

b) the dividend growth model (look up the constant-growth dividend model if you dont recall it. Make sure you pick up the right dividend (D₁ or the forecast dividend, not D₀ the last dividend).

c) Which method would you prefer and why?