5. The cost of retained earnings The cost of retained earnings If a firm cannot invest retained earnings to eam a rate of return greater than or equal to alt the required rate of retum on retained earings, i should return those funds to its stockholders. less than The cost of equity using the CAPM approach greater than or equal to The yield on a three-month T-bill is 3%, the yield on a 10-year T-bond is 4.51%. The market risk premium is 8.58% and the Burris Company has beta of 0.88. Using the Capital Asset Pricing Model (CAPM) approach, Burris's cost of equity is The cost of equity using the bond yield plus risk premium approach In contrast, the Adams company is closely held and therefore, cannot generate reliable inputs with which to apply the CAPM method to estimate les cost of internal equity (retained earnings). However, management knows that its outstanding bonds are currently vielding 10.37%, and the firm's analysts estimate that the risk premium of its stocks over its bonds currently 1.629. As result. Adams's cost of internal equity based on the n-bond-vield-plus-judgemental-risk-premium approach -- 13. 1993 11.999 112895 34.9995 The cost of equity using the discounted cash flow (or dividend-yield-plus-growth-rate) approach Se Enterprise currently seling for $1.00 per here in the recentne to be one on Tone here to search The yield on a three-month T-bill is 3%, the yield on a 10-year T-band is 4.51%. The market risk premium is 8.58% and the Burris Company has a beta of 0.88. Using the Capital Asset Pricing Model (CAPM) approach, Burris's cost of equity is The cost of equity using the bond yield plus risk premium approach 12.66% 10.85% In contrast, the Adams Company is closely held and, therefore, cannot generate reliable inputs to apply the CAPM method to estimate its 14.472% cost of internal equity (retained earnings). However, its management knows that its outstandin currently yielding 10.37%, and the firm's analysts estimate that the risk premium of its stocks over its bonds is currently 1.62%. As resu 12.06% cost of internal equity G.) based on the own-bond-yield-plus-judgemental-risk-premium approach-is: 13.19% O 11.99% 11.39% 14.9996 The cost of equity using the discounted cash flow (or dividend-yield-plus-growth-rate) approach Tyler Enterprises's stock is currently selling for $21.00 per share, and the firm expects its per-share dividend to be $2.25 in one year. Analysts project the firm's growth rate to be constant at 4.40%. Using the discounted cash flow (or dividend-yield-plus-growth-rate) approach, what is Tyler's cost of internal equity? 15.8798 20.404 15.11% The cost of equity using the discounted cash flow for dividend yield plus growth rate) approach Tyler Enterprises's stock is currently selling for $21.00 per share, and the firm expects its per-share dividend to be $2.25 in one year. Analysts project the firm's growth rate to be constant at 4.40%. Using the discounted cash flow (or dividend yield-plus-growth-rate) approach, what is Tyler's cost of internal equity? 15.87% O 20.40% O 14.35% 15.11% 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 dividend Vield-plus-growth-rate) approach. In general, there are three available methods to generate such an estimate: 7.659 Carry forward a historical realized growth rate and apply it to the fr Locate and sodiy an expectes future growth rate prepared and publ Use the recention growth made fecurity analysts 8,3595 2.809 ends. It also historically generated an age return on 43.00% Suppose Tyler Enterprise is currently stributing of amings! eu (ROE OF 8.00 It reasonable tomate Ter growth rate Grace Mew Save & Conne Love without
