3. The cost of retained earnings

True or False: It is free for a company to raise money through retained earnings, because retained earnings represent money that is left over after dividends are paid out to shareholders.

True

False

The current risk-free rate of return is 4.60% and the current market risk premium is 6.10%. Green Caterpillar Garden Supplies Inc. has a beta of 1.56. Using the Capital Asset Pricing Model (CAPM) approach, Green Caterpillars cost of equity is ______

Cute Camel Woodcraft Company is closely held and, as a result, cannot generate reliable inputs for the CAPM approach. Cute Camels bonds yield 10.20%, and the firms analysts estimate that the firms risk premium on its stock relative to its bonds is 3.50%. Using the bond-yield-plus-risk-premium approach, the firms cost of equity is___________ .

The stock of Cold Goose Metal Works Inc. is currently selling for $45.56, and the firm expects its dividend to be $1.38 in one year. Analysts project the firms growth rate to be constant at 5.70%. Using the discounted cash flow (DCF) approach, Cold Gooses cost of equity is estimated to be. _________ .

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