Doosan Babcock, a Scottish electronic equipment manufacturer and a publicly held company, is evaluating the cost of equity capital for the firm. The firm’s shares are selling for \($35.00;\) it expects to pay an annual cash dividend of \($3.50\) a share next year, and the firm’s investors anticipate an annual rate of return of 17 percent.

a. If the firm is expected to provide a constant annual rate of growth in dividends, what rate of growth must the firm experience?

b. If the risk-free rate of interest is 4 percent and the market risk premium is 7 percent, what must the firm’s beta be to warrant a 17 percent expected rate of return on the firm’s stock?

c. The discounted cash flow method for evaluating a firm’s cost of equity financing is based on the assumption that future dividends grow at a constant rate forever. How do you think the cost of equity would be affected if the rate of growth in future dividends were to decline over time.