Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Problem 9-10
The earnings, dividends, and stock price of Shelby Inc. are expected to grow at 3% per year in the future. Shelby's common stock sells for $29.75 per share, its last dividend was $2.00, and the company will pay a dividend of $2.06 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 0.6, the risk-free rate is 4%, and the expected return on the market is 13%, 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 12%, 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.
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