If a firm cannot invest retained earnings to eam a rate of retum the required rate of return on retained earnings, it should return those funds to its stockholders. The cost of equity using the CAPM approach The yeld on a three-month T-bill is 3%, the yleld on a 10 -year T-bond is 4.514%. The market risk premium is 8.589k and the Allen Company has a beta of 0.88 . Using the Capral Asset Pricing Modet (CAPM) apgroach, Allen's cost of equity is The cost of equity using the bond vield plus risk premium approach In contrast, the Adams. Company is closely heid and, therefore, carnot generate reliable input cost of internal equity (retained earnings). Hawever, its mansgement knows that its outstandi own-bond-yeld-plus-judgentenkalisk-premivm approach-is: 14,30% 19) 106 13.19% The cost of equity using the discounted cash flow (or dividend-yield-plus-growth-rate) approach Grant Enterprises's stock is currently selling for $21.00 per share, and the firm expects its per-share dividend to be $2.25 in one year. Analysts projec the firm's growth rate to be constant at 4.40%. Using the discounted cash flow (or dividend-yleld-plus-growth-rate) approach, what is Grant's cost of internal equity? 15.11% 12.84% 14,35% 15.87% 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 dividendVield-plus-growth-rate) approach. In general, there are three avaiable methods to generate such an estimate: - Carry forward a historical realized growth rate, and apply it to the future. - Locate and spply an expected future growth rate prepered and published by pecurity analysts. - Use the retention growth model. Suppose Grant Enterptisess is currendy distributing 65% of its earnings as cosh dividends. It has also historically generated an average return on equity (ROE) of 8.00%. It is reasonable to estimate Grantis growth rate is