Reference no: EM131323992
The earnings, dividends, and common stock price of Shelby Inc. are expected to grow at 5% per year in the future. Shelby's common stock sells for $26.25 per share, its last dividend was $1.80, and the company will pay a dividend of $1.89 at the end of the current year.
a. Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places. %
b. If the firm's beta is 1.3, the risk-free rate is 8%, 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. %
c. If the firm's bonds earn a return of 8%, 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? Round your answer to two decimal places. (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? Assume Shelby values each approach equally. Round your answer to two decimal places.
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: The earnings, dividends, and common stock price of Shelby Inc. are expected to grow at 5% per year in the future. Shelby's common stock sells for $26.25 per share, its last dividend was $1.80, and the company will pay a dividend of $1.89 at the end o..
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