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 $29.25 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.

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

?%

b. If the firm's beta is 2.2, the risk-free rate is 3%, and the expected return on the market is 14%, then what would be the firm's cost of equity based on the CAPM approach? Round your answer to two decimal places.

?%

c.If the firm's bonds earn a return of 10%, then what would be your estimate of rsusing 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.)

?%

d. 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.

?%