Q2. Firm As shares have a beta of 2.05. The firm just paid dividend of $1.06, and the dividends are expected to grow at 3 per cent. The expected return on the market is 12 per cent, and risk-free rate is 4.3 per cent. The most recent share price is $89.

1. Calculate the cost of equity using the dividend growth model

2. Calculate the cost of equity using the SML method

3. Why are the estimates in a. and b. so different?