Financial Question- 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%, and the current dividend yield is 2%. Its beta is 1.2, the market risk premium is 8%, and the risk-free rate is 4%.

a.  Use the CAPM to estimate the firm’s cost of equity.

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b.  Now use the constant growth model to estimate the cost of equity. c.  Which of the two estimates is more reasonable?