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.

A. Using the discounted cashflo approach, what is its cost of equity?

B. If the firms beta is 1.6, the risk free rate is 9%, the expected return on the market is 13%, then what would the firms cost of equity based on the CAPM approach?

C.If the firms bond earns a return of 12%, then what would be your estimate of Rs using the own-bond-yield-plus-judgement-risk-premium approach?

D. On the basis of the results of a through c, what would be your estimate of shelbys cost of equity?

Explanation / Answer

B.-

COST OF EQUITY(CAPM)= RF+BETA(RM-RF)

= 9%+1.6(13%-9%)

= 18.6%

I DON'T KNOW THE ANSWERS OF OTHER 3 QUESTION

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