The earnings, dividends, and common stock price of Shelby Inc. are expected to g

Question

The earnings, dividends, and common stock price of Shelby Inc. are expected to grow at 4% per year in the future. Shelby's common stock sells for $30.00 per share, its last dividend was $2.50, and and the company will pay a dividend of $2.60 at the end of the current year. A. Using the discounted cash flow approach, what is its cost of common equity? Round your answer to two decimal places. ? % B. If the firm's beta is 1.2, the risk-free rate is 3%, and the expected return on the market is 13%, 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 11%, and analysts estimate the market risk premium is 3 to 5 percent, then what would be your estimate of rs using the over-own-bond-yield-plus-judgmental-risk-premium approach? (Hint: Use the midpoint 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? Round your answer to two decimal places. ? %

Explanation / Answer

a. Using discounted cash flow approach, what is the cost of equity?

ks = + g = + 7% = 9.3% + 7% = 16.3%.

b. If the firm

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