6. The cost of retained earnings

True or False: It is free for a company to raise money through retained earnings, because retained earnings represent money that is left over after dividends are paid out to shareholders.

True or False

The cost of equity using the CAPM approach

The yield on a three-month T-bill is 3.29%, and the yield on a 10-year T-bond is 4.67%. the market risk premium is 6.17%. The Monroe Company has a beta of 0.92. Using the Capital Asset Pricing Model (CAPM) approach, Monroes cost of equity is:

A. 10.87%

B. 12.42%

C. 9.32%

D. 10.35%

The cost of equity using the bond yield plus risk premium approach

The Lincoln Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a companys cost of internal equity. Lincolns bonds yield 11.52%, and the firms analysts estimate that the firms risk premium on its stock over its bonds is 4.95%. Based on the bond-yield-plus-risk-premium approach, Lincolns cost of internal equity is:

A. 20.59%

B. 15.65%

C. 16.47%

D. 18.12%

The cost of equity using the discounted cash flow (or dividend growth) approach

Johnson Enterprisess stock is currently selling for $25.67 per share, and the firm expects its per-share dividend to be $2.35 in one year. Analysts project the firms growth rate to be constant at 5.72%. Using the cost of equity using the discounted cash flow (or dividend growth) approach, what is Johnsons cost of internal equity?

A. 14.87%

B. 20.07%

C. 14.13%

D. 15.61%