Eaton Electronic Companys treasurer uses both the capital asset pricing model and the dividend valuation model to compute the cost of common equity (also referred to as the required rate of return for common equity).

Assume:

Rf=5%

Km=10%

=1.2

D1=$0.80

P0=$20

g=7%

1. Compute _Ki (required rate of return on common equity based on the capital asset pricing model).
2. Compute _Ke (required rate of return on common equity based on the dividend valuation model).