QUESTION 10

Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: risk-free rate = 2.40%; required return on the market = 12.25%; and beta = 1.20. Based on the CAPM approach, what is the cost of equity from retained earnings?

QUESTION 13

The CFO of Lenox Industries hired you as a consultant to help estimate its cost of capital. You have obtained the following data: (1) rd = yield on the firms bonds = 8.50% and the risk premium over its own debt cost = 6.00%. (2) risk-free rate = 2.60%, market risk premium = 8.50%, and beta = 1.45. (3) D0 = $1.50, P0 = $25.00, and g = 6.00% (constant). You were asked to estimate the cost of 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?

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