Problem 9-10 (Cost of Equity)

Cost of Equity The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 5% per year in the future. Shelby's common stock sells for $27 per share, its last dividend was $3.00, and the company will pay a dividend of $3.15 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. % b. If the rm's beta is 1.7, the risk-free rate is 8%, and the expected return on the market is 12%, then what would be the rm's cost of equity based on the CAPM approach? Round your answer to two decimal places. % c. If the rm's bonds earn a return of 11%, then what would be your estimate of rS 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. % 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. %