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Quantitative Problem: Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Barton expects
Quantitative Problem: Barton Industries estimates its cost of common equity by using three approaches: the CAPM, the bond-yield-plus-risk-premium approach, and the DCF model. Barton expects next year's annual |dividend, D1, to be $1.50 and it expects dividends to grow at a constant rate g = 4.8%. The firm's current common stock price, Po, is $25.00. The current risk-free rate, rRF, = 4.2%; the market risk premium, RPM, = 5.8%, and the firm's stock has a current beta, b, 1.10. Assume that the firm's cost of debt, rd, is 8.22%. The firm uses a 2.8% risk premium when arriving at a balllpark estimate of its cost of equity using the bond-yield plus-risk-premium approach. 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: % Bond yield plus risk premium: DCF cost of equity
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