4. The cost of retained earnings If a firm cahnot invest retained earnings to earn a rate of return greater than or equal to F the required rate of return on retained earnings, it should retum those funds to its stockholders. The cost of equity using the CAPM approach The current risk-free rate of return (Tuy) is 3.86% while the market risk premium is. 6,639 . The Allen Company has a beta of 0.92 . Using the capital asset pricing model (CAPM) approach, Allen's cost of equity is The cost of equity using the bond yleld plus risk premium approach The Taylor Company is closely held and, therefore, cannot generate reliable iaputs with which to use the capM method for estimating a company's cost of internal equity. Taylor's bonds yield 11.52%, and the firm's analysts estimate that the firm's fisk premium on sts stock over its bands is a.95\%. Bared on the bond-vield-plus-risk-premium approach, Tayior's cost of internat equity is: 18.12% 19.76% 15.652 16.420N The cost of equity using the discounted cash flow (or dividend growth) approach Grant Enterprises's stock is currently selting for 532.45 per share, and the firm expects its per-share dividend to be $2,35 in one year. Analysts project the firm's growth rate to be constant at 5.72%4. Ertimating the cost of equity using the discounted cash flow (or dividend growth) approach, what is Grant's cost of intemal equity? 16.20%12.96%13.61%12.31% Estimating growth rates It is ohen difficuit to estimate the expected future dividend growth rate for use in estimating the cost of existing equity using the DCF or DG approach In general, there are three available methods to generate such an estimate: - Carry forward a historical realired growth rate, and apply it to the future. - Locate and apply an expected future growth rake prepared and published by security analysth. - Use the retemtion growh model. Suppose Grant is currentiy distributing dow of its earnings in the form of cash eividends. It fas atwo fistorically generaled an average return en equity (RQE) of b\%. Grant's estimated growth rate is