Handy Handbags (HH) recently paid a dividend of $2.00 (D₀), which is expected to grow at 7%. HHs stock price is $23, its beta is 1.6, the yield on its bonds is 12%, and the risk premium on the companys own stock is 5%. The risk-free rate is 6% and the market risk premium is 4%. Flotation costs will be 10% if Handy issues new common stock.

Part A

Using the capital asset pricing model method, compute the cost of retained earnings for HH:

options:

	13.6%
	14.0%
	18.4%
	12.4%

Part B

Using the discounted cash flow method, compute the cost of retained earnings for HH:

options:

	16.3%
	15.7%
	18.4%
	13.3%

Part C

Using the bond yield plus risk premium method, compute the cost of retained earnings for HH:

options:

	17%
	19%
	11%
	16%

Part D

Using the discounted cash flow method, compute the cost of new common stock for HH:

options:

	14.3%
	17.3%
	16.7%
	10.3%