Cost of Equity The earnings, dividends, and stock price of Shelby Inc. are expec
ID: 2809489 • Letter: C
Question
Cost of Equity The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 6% per year in the future. Shelby's common stock sells for $26.75 per share, its last dividend was $2.50, and the company will pay a dividend of $2.65 at the end of the current year. Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places. % If the firm's beta is 1.6, the risk-free rate is 4%, 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. % If the firm's bonds earn a return of 11%, 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.) % 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.
Explanation / Answer
Common stock cost (under DCF) 15.91% =2.65/26.75+6% Common stock cost (under Yild+RP) 19.00% =11%+(12%-4%) Common stock cost (under CAPM) 16.80% =4%+1.6*(12%-4%) Best estimate of cost of equity (Average) 17.24%