Question 1: As the assistant to the CFO of Johnstone Inc., you must estimate its cost of common equity.

You have been provided with the following data: D0 = $0.80; P0 = $22.50; and g = 8.00% (constant).

Based on the DCF approach, what is the cost of common from retained earnings?

Question 2

You have been hired by the CFO of Lugones Industries to help estimate its cost of common equity. You have obtained the following data:

(1) rd = yield on the firms bonds = 7.00% and the risk premium over its own debt cost = 4.00%.

(2) rRF = 5.00%, Market Risk Premium = 6.00%, and = 1.25.

(3) D1 = $1.20, P0 = $35.00, and g = 8.00% (constant).

You were asked to estimate the cost of common equity based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference?