Kmart shares have a beta of 1.05. The company has just paid a dividend of $1.10, and the dividends are expected to grow at 2.5%. The expected return of the market is 9% and the risk-free rate is 1.5%. The most recent share price for Kmarts shares is $51.

a. Calculate the cost of equity using the dividend growth model method. (10)

b. Calculate the cost of equity using the SML method. (10)

c. Why do you think your estimates in a and b are so different? (5)