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The earnings, dividends, and stock price of Shelby...

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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 cash flow approach, what is its cost of equity? b. If the firm?s beta is 1.6, 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 12%, then what would be your estimate of rs (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?

 

Paper#10183 | Written in 18-Jul-2015

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