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0 o 3 10: Assignment - The Cost of Capital Search this course 4. 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 False The cost of equity using the CAPM approach The current risk free rate of return() is 3.86% while the market risk premium is 5.75%. The Allen Company has a beta de 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 Uncoln Company is closely held and therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company cost of internal equity. Lincoln's bords Hield 10.28%, and the firm's analysts estimate that the firm's tisk premium on ts stock over its bones 3.559. Based on the band-veld-plas-risk-premium approach, Lincoln's cost of Internal equity is 15.214 17.2004 14 PM a Search this con Ch 10: Assignment - The Cost of Capital The Uncoln Company is dosely held and therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Uncoln'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, Lincoln's cost of internal equity is: O 15.21% O 17.299 13.149 13,83% The cost of equity using the discounted cash flow (or dividend growth) approach Full Kirby Enterprises's stock is currently selling for $25.67 per share, and the firm expects its per-share dividend to be $1.38 in one veat. Analysts project the firm's growth rate to be constant at 5.72%. Estimating the cost of equity using the discounted cash flow for dividend growth) approach. what is Kirby's cost of internal equity? 0 11.6696 0 10.5596 14.999 11.1096 10 Search this cou 10.55% 0 14.99% O 11.10% 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 55% of its earnings in the form of cash dividends. It has also historically generated an average turn on equity (ROE) of 24% Kirby's estimated growth rate is Grade it Now Save & Continue Continue without saving