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Question - The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 4% per year in the future. Shelby's common stock sells for $28 per share, its last dividend was $2.50, 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 equity?
b. If the firm's beta is 1.1, the risk-free rate is 9%, and the expected return on the market is 13%, then what would be the firm's cost of equity based on the CAPM approach?
c. If the firm's bonds earn a return of 10%, then what would be your estimate of rs using the own-bond-yield-plus-judgmental-risk-premium approach?
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.
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