Cost of Equity

The earnings, dividends, and stock price of Shelby Inc. are expected to grow at $8\%$ per year in the future. Shelby's

common stock sells for $$21$ per share, its last dividend was $$1\mathrm{.}50,$ and the company will pay a dividend of $$1\mathrm{.}62$ at

the end of the current year.

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

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b$.$ If the firm's beta is $1\mathrm{.}9,$ the risk$-$free rate is $10\%,$ and the expected return on the market is $12\%,$ then what would

be the firm's cost of equity based on the CAPM approach? Round your answer to two decimal places.

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c$.$ If the firm's bonds earn a return of $10\%,$ 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.

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d$.$ On the basis of the results of parts a$-$c$,$ what would be your estimate of Shelby's cost of equity? Assume Shelby

values each approach equally. Round your answer to two decimal places.

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