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Problem 9-10 Cost of Equity The earnings, dividends, and stock price of Shelby Inc. are expected...

Problem 9-10
Cost of Equity

The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 8% per year in the future. Shelby's common stock sells for $20.75 per share, its last dividend was $1.50, and the company will pay a dividend of $1.62 at the end of the current year.

  1. Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places.
    %
  2. If the firm's beta is 2.2, the risk-free rate is 5%, 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.
    %
  3. If the firm's bonds earn a return of 12%, then what would be your estimate of rs using the over-own-bond-yield-plus-judgmental-risk-premium approach? Round your answer to two decimal places. (Hint: Use the midpoint of the risk premium range.)
    %
  4. On the basis of the results of parts a through 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.
    %
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Answer #1

a)

b)

Please do not downvote for not answering the remaining questions. As per Chegg guidelines, when there are multiple questions, we are encouraged to provide a solution to at least the first question.

So, can you please upvote? Thank you :-)

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