A firms earnings, dividends and stock price will grow at 5% in the near future. Current stock price is $25.00. Its last dividend was $2.00. The firm will pay a dividend of $2.10 at the end of the current year.

Questions:

1. Using the discounted cash flow method, what is the cost of equity?

2. If the firms beta is 1.5, the risk free rate is 4%, and the expected market return is 10%, then what would the firms cost of equity be based on the CAPM approach?