Your business has expanded and your team is looking for new funds. To secure your valuation, a prospective investor requires you to indicate a cost of equity and a weighted average cost of capital.

For this purpose, you have gathered the following information:

Your industry comparable stock beta is 1.28

Your company is currently valued at $97 per share

Your business has just paid a dividend of $1.10

The dividends are expected to grow by +3.00% a year over an indefinite future

The expected return on the market is 8.50% for a risk-free rate of 1.50%

Your prospective investor has also shared some information on his own company:

Tax rate: 17.00%

Common stock:

- 2,000 shares currently valued at $74.00 per share

- His industry comparable stock beta is 0.90

- His business just paid a dividend of $3.15

- The dividend is expected to grow by +2.00% per year indefinitely

Debt:

- 110 bonds outstanding with 13 years to maturity, 4.7 percent coupon and a market price of $1,070. The bonds pay interest semi-annually.

(a) Determine the cost of equity using the dividend growth model (DDM) method. (3 marks)

(b) Determine the cost of equity using the Capital Asset Pricing Model (CAPM) method. (5 marks)

(c) Explain the reason(s) for the difference in your estimates under (a) and (b). (3 marks)

(d) Estimate the weight to use for debt when calculating the cost of capital of your prospective investor. (6 marks)

(e) Determine a WACC estimate for your prospective investor using CAPM. (8 marks)