Assume you expect a companys net income to remain stable at $3000 for all future years, and you expect all earnings to be distributed to stockholders at the end of each year, so that common equity also remains stable for all future years (this also assumes a clean surplus). Also, assume the companys = 1.2, the market risk premium is7% and the 20-year yield on risk-free government bonds is 5%. Finally, assume the company has 2000 ordinary shares outstanding.

Required:

a) Use the CAPM to estimate the companys equity cost of capital.

b) Compute the expected net distributions to stockholders (dividends) for each future year.