Question

The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 5% per year in the future. Shelby's common stock sells for $26.25 per share, its last dividend was $1.60, and the company will pay a dividend of $1.68 at the end of the current year.

a. Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places.

b. If the firm's beta is 2.2, the risk-free rate is 6%, and the expected return on the market is 12%, then what would be the firm's cost of equity based on the CAPM approach? Round your answer to two decimal places.

c. If the firm's bonds earn a return of 9%, then what would be your estimate of rs using the own-bond-yield-plus-judgmental-risk-premium approach? (Hint: Use the mid-point of the risk premium range.) Round your answer to two decimal places.

d. On the basis of the results of parts a–c, what would be your estimate of Shelby's cost of equity? Assume Shelby values each approach equally. Round your answer to two decimal places.

Answer 1

­SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

© v 1* 08:21 ENG 20-03-202024 CA476 - fx X BZ CA SHELBY CB CC C D CE a 457 DISCOUNTED CASH FLOW APPROACH ke = D1/PO + g ke = 1.68/26.25 +0.05 = 11.40% 463 464 465 CAPM APPROACH ke = Rf + beta(Rm-Rf) ke =6%+2.2*(6%)= Rm-Rf = RISK PREMIUM = 12%-6% =6% 19.20% 466 467 468 469 470 BOND YIELD PLUS APPROACH ke = BOND RATE + RISK PREMIUM ke = 9% +4% = 13.00% 472 COST OF EQUITY = 14.53% [(11.40% + 19.20% + 13.00%)/3] AVERAGE OF THREE RATES 477 478 479 480 481 KE CAPM UTILITY, SHARPE, beta coNvexity DGM beta port future INDEX INTL CAP BUD SANDRINE LEASING PORTFOLOQ DIR right clean YIELD bc ... ►