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The cost of equity using the CAPM approach The current risk-free rate of retum (1) 's 3.36 while the market risk premium is 5.751. The Burris Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Hurrascost of equity is The cost of equity using the bond yield plus riak premium approach The Adams Company is closely held and therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company cost of interal equity. Adams's bonds yield 11.524, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 2.554 Based on the bond-yield-plus-stok-premium approach, Adam's cout of internal equity is: 18.08 O 1432 16.555 15.07 The cost of equity using the discounted cash flow (or dividend growth) approach Grant Enterprises's stock is currently selling for $32.45 per share, and the firm expects its per-share dividend to be $1.38 in one year. Analysts project the firm's growth rate to be constant at 7.27%. Estimating the cost of equity using the discounted cash flow (ar dividend growtn) approach, what is Grant's cost of internal equity? 10.94% 14.40% 12.109 11.529 Estimating growth rates It is ohun difcut to estimate the expected future dividend growth rate for use in estimating the cost of existing equity uning the DF or DG approach In general, there are three available methods to generate such an estimate Carry forward autorical 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 Grant is currently distributing 55% of its earnings in the form of cash dividends. It has also historically generated an average return on equity (ROE) of 124. Grant's estimated growth rate is The cost of equity using the CAPM approach The current risk free rate of return (T) is 3.86% while the market risk premium i 5.79%. The Burrs Company has a beta of 0.78. Using the capital asset pricing model (CAPM) approach, Butler's cost of equity is 8.35% The cost of equity using the bond yield plus risk premium 7.515% The Adams Company is closely held and, therefore, cannot gend inputs with which to use the CAPM method for estimating a company's 9.185% cost of internal equity. Adams's bonds yield 11.52%, and their estimate that the firm's risk premium on its stock over its bonds is 3.55%. Based on the bond yield-plus-risk premium approach, Adams's 8.7675% al equity is 18.0896 Estimating growth rates It is often difficult to estimate the expected Nuture 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 historical realized growth rate, and apply it to the future. Locate and apply an expected future grond 57.00 prepared and published by security analysts. Use the retention growth model, 5.4 11.55 12.45 Jas in the form of cash dividends. It has also historically generated an average return on equity Suppose Grant is currently distributing 55% of (ROE) of 12%. Grant's estimated growth rate is