1. Cost of Equity

The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 5% per year in the future. Shelby's common stock sells for $20 per share, its last dividend was $2.00, and the company will pay a dividend of $2.10 at the end of the current year.

1. Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places.

%

2. If the firm's beta is 1.9, the risk-free rate is 9%, and the expected return on the market is 13%, then what would be the firm's cost of equity based on the CAPM approach? Round your answer to two decimal places.

%

3. If the firm's bonds earn a return of 12%, then what would be your estimate of r_s using the own-bond-yield-plus-judgmental-risk-premium approach? (Hint: Use the mid-point of the risk premium range.) Round your answer to two decimal places.

%

4. On the basis of the results of parts ac, what would be your estimate of Shelby's cost of equity? Assume Shelby values each approach equally. Round your answer to two decimal places.

%

2. Bond Yield and After-Tax Cost of Debt

A company's 4% coupon rate, semiannual payment, $1,000 par value bond that matures in 25 years sells at a price of $570.36. The company's federal-plus-state tax rate is 25%. What is the firm's after-tax component cost of debt for purposes of calculating the WACC? (Hint: Base your answer on the nominal rate.) Round your answer to one decimal place.