The Blue Sky Company has common stock outstanding that has a current price of $20 per share and a $1.50 current dividend (D₀). Blue Skys dividends are expected to grow at a rate of 5% per year, forever. The expected risk-free rate of interest is 3%, whereas the expected market risk premium [(R_M - R_f )= 7%]. The beta on Blue Skys stock is 1.25.

a. What is the cost of equity for Blue Sky using the dividend valuation model?

b. What is the cost of equity for Blue Sky using the capital asset pricing model (CAPM)?