n=r^s=D1/P0+Expectedgl. Investers expect to receive a dividend yleld, P0D1, plus a capital gain, g, for a total expected return, In - this expected return is also equal to the required return. It's easy to calculate the dividend yield; but because stock prices fluctuate, the yield varies from day to day, which feads to Fuctuations in the DCF cost of equity. Also, it is difficult to determine the proper growth especially if past growth rates are not expected to continue in the future. However, we can use growth rates as projected by security analysts, who regularly forecast growth rates of earnings and dividends. Which method should be used to estimate fs? If management has confidence in one method, it would probably use that method's estimate. Otherwise, it might use some weighted averoge of the three methods. Judgment is important and comes into play here, as is true for most decisions in finance. Quantitative Problem: Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium opproach, and the DCF model. Barton expects next year's annual dividend, O1, to be $1.50 and it oxpects dividends to grow at a constant rate 9= firm's stock has a current beta, b,=1.30, Assume that the firm's cost of debt, re, is 6.15%. The firm uses a 3.5% risk premium when arriving at a balipark estimate of its cost of equity using the bend-yield-plus-riskpremium epproach. What is the firm's cost of equity using each of these three approaches? Round your answers to two decimal places. CAPM cost of equity: Eond yeld plus rikk premium: DCF cost of equity: What is your best estimate of the firm's cost of equity