The earnings, dividends, and stock price of Shelby Inc. are expected to grow at

Question

The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 7% per year in the future. Shelby’s common stock sells for $23 per share, its last dividend was $2.00, and the company will pay a dividend of $2.14 at the end of the current year.

c. If the firm’s bonds earn a return of 12%, 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.)

d. On the basis of the results of Parts a through c, what would be your estimate of Shelby’s cost of equity?

Please answer both c and d by providing Excel syntax; no hand-written answers

Explanation / Answer

As question a and b are missing, answer is given on basis of data available

c) ks = Bond rate + Risk premium = KD + (kM - kRF) = 12% + (13%-9%)= 12% + 4% = 16%.

d) The firm's cost of equity should be estimated to be the average of the methods used in evealuating cost of equity.

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