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Problem 9-10 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 $27.75 per share, its last dividend was $2.50, and the company will pay a dividend of $2.70 at the end of the current year.

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

If the firm's beta is 2.2, the risk-free rate is 4%, 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. ___%

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

On the basis of the results of parts a through 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. ___%