Consider the following facts and estimates for LS corp:

Estimates

Stock Price= $80

b_{Luxury Suites} = 1.50

Treasury security rate = 6%

Market yield on comparable

quality bond = 10%

Expected return on the market

portfolio = 12%

Expected risk premium of stocks

over bonds = 5%

Shares outstanding = 50million

Bond Price = $800

Bonds outstanding = 12.5 million

Year Dividends Per Share for previous years

-7 $2.60

-6 $2.70

-5 $2.80

-4 $2.90

-3 $3.10

-2 $3.40

-1 $3.70

0 $3.92

1. What is the estimated cost of common equity employing the following approaches: (1) dividend growth valuation, (2) CAPM, (3) bond yield plus expected risk premium?

2. One of the estimates from (a) is substantially lower than the other two. Why might this particular estimate be low?

3. What is the best estimate of LSs cost of common equity?

4. Assume that LSs corporate tax rate is 25%, what is your estimate of LSs weighted average cost of capital?