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 The current risk-free rate of return (FRF) is 4.23% while the market risk premium is 6.17%. The Jefferson Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Jefferson's cost of equity is The cost of equity using the bond yield plus risk premium approach The Kennedy Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Kennedy'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, Kennedy's cost of internal equity is: 13.83% 13.14% 16.60% 17.29% The cost of equity using the discounted cash flow (or dividend growth) approach 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 The current risk-free rate of return (TRF) is 4.23% while less than k premium is 6.17%. The Jefferson Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Jefferson's cost of equity is The cost of equity using the bond yield plus risk premium approach The Kennedy Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Kennedy'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, Kennedy's cost of internal equity is: O 13.83% 13.14% 16.60% 17.29% 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 The current risk-free rate of return (TRI) is 4.23% while the market risk premium is 6.17%. The Jefferson Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Jefferson's cost of equity is The cost of equity using the bond yield plus risk premium approach 8.136% The Kennedy Company is closely held and, therefore, cannot generate reli 9.944% cost of internal equity. Kennedy's bonds yield 10.28%, and the firm's analy 3.55%. Based on the bond-yield-plus-risk-premium approach, Kennedy's ith which to use the CAPM method for estimating a company's that the firm's risk premium on its stock over its bonds is al equity is: 9.04% 10.848% 13.83% 13.14% 16.60% 17.29% The cost of equity using the discounted cash flow (or dividend growth) approach Kirby Enterprises's stock is currently selling for $32.45 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 7.27%. Estimating the cost of equity using the discounted cash flow (or dividend growth) approach, what is Kirby's cost of internal equity? 18.14% 14.51% 13.78% 19.59% 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 prepared and published by security analysts. Use the retention growth model.. Suppose Kirby is currently distributing 75% of its earnings in the form of cash dividends. It has also historically generated an average return on equity (ROE) of 12%. Kirby's estimated growth rate is %. Carry forward a historical realized growth 37.00 apply it to the future. repared and published by security analysts. Locate and apply an expected future gro Use the retention growth model. 3.0 12.25 11.75 Suppose Kirby is currently distributing 75% of it (ROE) of 12%. Kirby's estimated growth rate is Js in the form of cash dividends. It has also historically generated an average return on equity %
