4. The cost of retained earnings The cost of raising capital through retained earnings is the cost of raising capital through issuing new common stock. The current risk-free rate of return is 4.20% and the current market risk premium is 6.10%. Fuzzy Button Clothing Company has a beta of 1.56. Using the Capital Asset Pricing Model (CAPM) approach, Fuzzy Button's cost of equity is Green Caterpillar Garden Supplies Inc. is closely held and, as a result, cannot generate reliable inputs for the CAPM approach. Green Caterpillar's bonds yield 11.50%, and the firm's analysts estimate that the firm's risk premium on its stock relative to its bonds is 3.00%. Using the Bond-Yield. plus-Risk-Premium approach, the firm's cost of equity is The stock of Blue Hamster Manufacturing Inc. is currently selling for $32.45, and the firm expects its dividend to be $2.35 in one year. Analysts project the firm's growth rate to be constant at 5.70%. Using the discounted cash flow (DCF) approach, Blue Hamster's cost of equity is estimated to be It is often difficult to estimate the expected future dividend growth rate for use in estimating the cost of existing equity using the DCF approach. In general, there are three available methods to generate such an estimate: . Carry forward a historical realized growth rate, and apply it to the future Locate and apply an expected future growth rate prepared and published by security analysts. . Use the retention growth model Suppose Blue Hamster Manufacturing Inc. is currently distributing 55.00% of its earnings in the form of cash dividends. It has also historically generated an average return on equity (ROE) of 8.00%. Blue Hamster Manufacturing Inc.'s estimated growth rate is