Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Barton expects next year's annual dividend, D₁, to be $1.50 and it expects dividends to grow at a constant rate g = 4.0%. The firm's current common stock price, P₀, is $25.00. The current risk-free rate, r_RF, = 5.0%; the market risk premium, RP_M, = 6.4%, and the firm's stock has a current beta, b, = 1.25. Assume that the firm's cost of debt, r_d, is 3.60%. The firm uses a 3.4% risk premium when arriving at a ballpark estimate of its cost of equity using the bond-yield-plus-risk-premium approach. What is the firm's cost of equity using each of these three approaches? Round your answers to two decimal places.

CAPM cost of equity: %

Bond yield plus risk premium: %

DCF cost of equity: %

What is your best estimate of the firm's cost of equity?

Question

Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Barton expects next year's annual dividend, D₁, to be $1.50 and it expects dividends to grow at a constant rate g = 4.0%. The firm's current common stock price, P₀, is $25.00. The current risk-free rate, r_RF, = 5.0%; the market risk premium, RP_M, = 6.4%, and the firm's stock has a current beta, b, = 1.25. Assume that the firm's cost of debt, r_d, is 3.60%. The firm uses a 3.4% risk premium when arriving at a ballpark estimate of its cost of equity using the bond-yield-plus-risk-premium approach. What is the firm's cost of equity using each of these three approaches? Round your answers to two decimal places.