If a firm cannot invest retained earnings to carn a rote of return the required rate of return on retained eamings, if should return those funds to its stockholders. The cost of equity using the CAPM approach The current nsk-free mate of return (rnu) is 4.67% while the market risk premium is 5.75%. The Bums Company has a beta of 1.56 . Using the capital asset pnong model (CAPM) approach, Burns's cost of equity is The cost of equity using the bond yield plus risk premium approach The Adams Compary is dosely held and, therefore, cannot generate reliable inputs with which to use the cAPM method for estimating a company's cost of internal equity. Adams's bonds yield 11.52%, and the fim's analysts estimate that the firm's risk premium on its stock over its bonds is 5.89. Based on the bond yield plus-risk-premium approach, Mdarns's cost of imtemal equity is: 19.15% 16.54% 21.76% 17.41% The cost of equity using the discounted cash flow (or dividend growth) approach Johnson Enterprises's stock is currenty selling for $45.56 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 5.72%. Estimating the cost of equity using the discounted cash flow (or dividend growth) approach, what is Johnsom's cost of internal equity? 11,81% 8.75% b. 31% 9.19% Estimating growth rates It is often difficult to estichate the expected future dividend growth rate for use in estirnating the cost of existing equity using the DCF or DG approach. In general, there are three avalable methods to generate such an estimate: - Carry forward a histoncal realized growth rate, and apply it to the future. - Locate and apply an expected future growh rate prepared and published by secunty analysts. - Uset the retention growh model. Suppose Johnson is currently destrbuting 65% of its earnings in the form of cash dividends. f has alsa historically generated an average retum on equity (ROt) of 22%. Johruon's estimated growth rate is 46