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    Cost of Equity. Bunkhouse Electronics is a recently incorporated firm that makes electronic entertainment systems. Its earnings and dividends have been growing at a rate of 30 percent, and the current dividend yield is 2 percent. It beta is 1.2, the market risk premium is 8 percent, and the risk-free rate is 4 percent.
    a. Calculate two estimates of the firm's cost of equity?
    b. Which estimate seems more reasonable to you? Why?

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    Solution Preview

    a. Calculate two estimates of the firm's cost of equity.

    The two estimates can be made using
    1. The dividend discount model which gives the
    Cost of equity = D1/MP + g
    where D1/MP is the dividend yield and g is the ...

    Solution Summary

    The solution explains how to calculate the cost of equity using two methods