Ch $11$: Assignment $-$ The Cost of Capital

The yield on a three$-$month T$-$bill is $3\%,$ the yield on a $10-$year T$-$bond is $4\mathrm{.}09\%.$ The market risk premium is $7\mathrm{.}77\%$ and the Jefferson Company has a beta of $1\mathrm{.}10.$ 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

In contrast, the Jackson Company is closely held and, therefore, cannot generate reliable inputs with which to apply the CAPM method to estimate its cost of internal equity $($retained earnings$).$ However, its management knows that its outstanding bonds are currently yielding $9\mathrm{.}40\%,$ and the firm's analysts estimate that the risk premium of its stocks over its bonds is currently $2\mathrm{.}04\%.$ As result, Jackson's cost of internal equity $(r_s)-$ based on the own$-$bond$-$yield$-$plus$-$judgemental$-$risk$-$premium approach$-$is:

$12\mathrm{.}58\%$

$11\mathrm{.}44\%$

$13\mathrm{.}73\%$

$14\mathrm{.}30\%$

The cost of equity using the discounted cash flow $($or dividend$-$yield$-$plus$-$growth$-$rate$)$ approach

Kirby Enterprises's stock is currently selling for $$18\mathrm{.}00$ per share, and the firm expects its per$-$share dividend to be $$4\mathrm{.}00$ in one year. Analysts project the firm's growth rate to be constant at $4\mathrm{.}80\%.$ Using the discounted cash flow $($or dividend$-$yield$-$plus$-$growth$-$rate$)$ approach, what is Kirby's cost of internal equity?

$22\mathrm{.}97\%$

$27\mathrm{.}02\%$

$28\mathrm{.}37\%$

$36\mathrm{.}48\%$