The earnings, dividends, and stock price of Shelby Inc. areexpected to grow at 4% per year in the future. Shelby's commonstock sells for $23 per share, its last dividend was $2.50, and thecompany will pay a dividend of $2.60 at the end of the currentyear.
- Using the discounted cash flow approach, what is its cost ofequity? Round your answer to two decimal places.
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- If the firm's beta is 1.8, the risk-free rate is 7%, and theexpected return on the market is 11%, then what would be the firm'scost of equity based on the CAPM approach? Round your answer to twodecimal places.
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- If the firm's bonds earn a return of 11%, then what would beyour estimate of rs using theown-bond-yield-plus-judgmental-risk-premium approach?(Hint: Use the mid-point of the risk premium range.) Roundyour answer to two decimal places.
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- On the basis of the results of parts a–c, what would be yourestimate of Shelby's cost of equity? Assume Shelby values eachapproach equally. Round your answer to two decimal places.
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