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5. The cost of retained earnings The cost of retained earnings The cost of raising capital through retained earnings is the cost of raising capital through issuing new common stock. The cost of equity using the CAPM approach The yleld on a three-month T-bill is 4%, the yield on a 10 -year T-bond is 4.72%. The market risk premium is 8.98% and the Wilson Company has a beta of 0.78. Using the Capital Asset Pricing Model (CAPM) approach, Wison's cost of equity is The cost of equity using the bond yleld plus risk premlum approach In contrast, the Adams Company is dosely 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 10.85%, and the firm's analysts estimate that the risk premium of its stocks over its bonds is currently 1.43\%6. As result, Adams's cost of internal equity (ris)-based on the own-bond-yield-plus-judgemental-risk-premium approach-is: 11.67% 14.74% 1228% 15.35% The cost of equity using the discounted cash flow (or dividend-yield-plus-growth-rate) approach Tucker Enterprises's stock is currently selling for $21.75 per share, and the firm expects its per-share dividend to be $3.25 in one year. Analysts project the firm's growth rate to be constant at 6.20%. Using the discounted cash flow (or dividend-yleld-plus-growth-rate) approach, what is Tucker's cost of internal equity? Estimating growth rates It is often difficuit to estimate the expected future dividend growth rate for use in estimating the cost of existing equity using the oCF (or dividendvield-plus-growth-rate) approach. In general, there are three avaliable methods to generate such an estimate: Estimating growth rates It i5 often difficult to estimate the expected future dividend growth rate for use in estimating the cost of existing equity using the DCF (or dividendyield-plus-growth-rate) approsch. In general, there are three avallable methods to generate such an estimate: - Carry forward a historical realized growth mte, 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 Tucker Enterprises's is currently distributing 70% of its earoings as cash dividends, It has also historically generated an average return on equity (ROE) of 10.50%. It is reasonable to estimate Tucker's growth rate is The cost of raising capital through retained earnings is the cost of raising capital through issuing new common stock. The cost of equity using the CAPM approach The yield on a three-month T-bill is 4%5, the yield on a 10 -year T-bond is 4.72%. The market risk premlum is 8.98% and the Wilson Company has a beta of 0,78 . Using the Capital Asset Pricing Model (CAPM) approach, Wison's cost of equity is The cost of equity using the bond yield plus risk premium approach In contrast, the Adams Company is closely held and, therefore, cannot generate reliable inputs with which to apply the CApM method to estimate its cost of internal equity (retalned earnings). However, its management knows that its outstanding bonds are currently yielding 10.85%, and the firm's analysts estimate that the risk premlum of its stocks over its bonds is currently 1.43\%6. As result, Adams's cost of internal equity (r, )-based on the own-bond-yield-plus-judgemental-fisk-premium approach-is: 11.67% 14.74% 12.28% 15.35% The cost of equity using the discounted cash flow (or dividend-yield-plus-growth-rate) approach Tucker Enterprises's stock is currently selling for $21.75 per share, and the firm expects its per-share dividend to be $3.25 in one year. Analysts project the firm's growth rate to be constant at 6.20%. Using the discounted cash fow (or dividend-yield-plus-growth-rate) approach, what is Tucker's cost of internal equity? 21.14% 20.08% 17.97% 28,54% 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 dividendyieid-plus-growth-rate) approach. In general, there are three avaliable methods to generate such an estimate: - Carry fonward 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. 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 dividendyield-plus-growth-rate) 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 Tucker Enterprises's is currently distributing 70% of its earnings as cash dividends. It has also historically generated an average return on equity (ROE) of 10.50%, It is reasonable to estimate Tucker's growth rate is