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 cost of equity using the CAPM approach greater than less than The current risk-free rate of return() is 3.86% while senirinn mal CAPM nach Allen' premium is 6.17%. The Allen Company has a beta of 0.78. Using the capital The cost of equity using the CAPM approach The current risk-free rate of return (tmp) is 3.86% while the market risk premium is 6.17%. The Allen Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Allen's cast of equity is 9.1035% The cost of equity using the bond yield plus risk premium 10.404% The Hoover Company is closely held and, therefore, cannot ger e inputs with which to use the CAPM method for estimating a company's cost of internal equity. Hoover's bonds yield 10.28%, and the 8.67% s estimate that the firri's risk premium on its stock over its bonds is 3.55%. Based on the bond-yield-plus-risk-premium approach, 9.537% bt of Internal equity is: The cost of equity using the bond yield plus risk premium approach The Hoover Company is closely held and, therefore, cannot generate rellable inputs with which to use the CAPM method for estimating a company's cost of internat equity. Hoover's bonds yield 10.28%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 3.55%. Based on the bond-yield-plus-risk-premium approach, Hoover's cost of Internal equity is: 13.83% 16.60% 15.21% 17.29% The cost of equity using the discounted cash flow (or dividend growth) approach Pierce Enterprises's stock is currently selling for $45.56 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%. Estimating the cost of equity using the discounted cash flow (or dividend growth) approach, what is Pierce's cost of interal equity? 13.60% O 11.42% 14.69% 10.88% Estimating growth rates It is often difficult 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 realized growth rate, and apply it to the future Locate and apply an expected future growth rate 20.55 and published by security anal*** Use the retention growth model. 75.00 110 19.45 Je form of cash dividends. It has also historically generated an average return on Suppose Pierce is currently distributing 45% of its eam equity (ROE) of 20%. Pierce's estimated growth rate is
