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The cost of equity using the bond yield plus risk premium approach The Adams Company is closely held and, therefore, cennot generate reliable inputs with which to use the CapM method for estimating a company's cost of internal equity. Adams's bonds yleld 10.28%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 5.89. Based on the bond-yleld-plus-risk-premlum approach, Adams's cost of internal equity is: 16.17%15.36%20.21%17.79% The cost of equity using the discounted cash flow (or dividend growth) approach Pierce Enterprises's 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 firm's growth rate to be constant at 5.72\%. Using the cost of equity using the discounted cash flow (or dividend growth) approach, what is Pierce's cost of intemal equity? 14.87% 20.0746 14.13% 15,61% 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 avaliable methods to generate such an estimate: - Carry forward a historical realized prowth rate, and apply it to the future. - Locate and apply on expected future growth rate prepared and published by security analysta. - Use the retention growth model. Suppose Pierce is currently distributing 50% of its earnings in the form of cash dividends, It has also historically generated an average return on equity (ROE) of 14%. Pierce's estimated growth rate is