6. The cost of retained earnings If a firm cannot invest retained earnings to earn a rate of return the required rate of return on retained earnings, it should return those funds to its stockholders. The cost of equity using the CAPM approach The yield on a three-month T-bill is 3.12%, and the yield on a 10 -year T-bond is 4.23%. the market risk premium is 5.75%. The Allen Company has a beta of 0.78. Using the Capital Asset Pricing Model (CAPM) approach, Allen'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 3.55\%. Based on the bond-yield-plus-risk-premium approach, Kennedy's cost of internal equity is: 16.60%17.29%13.83%15.21%