Maurice Tutor

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    Argosy University/ Phoniex University/
    Nov-2005 - Oct-2011

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    Phoniex University
    Oct-2001 - Nov-2016

Category > Management Posted 19 Jan 2018 My Price 5.00

CAPM approach

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 using the over-own-bond-yield-plus-judgmental-risk-premium approach?
(d) On the basis of the results of parts a through c, what would be your estimate of Shelby’s cost of equity?

Answers

Maurice Tutor
(5)
Status NEW Posted 19 Jan 2018 10:01 PM My Price 5.00

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