If a firm cannot invest retained earnings to earn a rate of return 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 yield on a three$-$month T$-$bill is $2\mathrm{.}74\%,$ and the yield on a $10-$year T$-$bond is $3\mathrm{.}86\%.$ the market risk premium is $6\mathrm{.}17\%.$ The Burris Company has a beta of $1\mathrm{.}56.$ Using the Capital Asset Pricing Model $($CAPM$)$ approach, Burris$$s cost of equity is $.$

The cost of equity using the bond yield plus risk premium approach

The Taylor Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company$$s cost of internal equity. Taylor$$s bonds yield $11\mathrm{.}52\%,$ and the firm$$s analysts estimate that the firm$$s risk premium on its stock over its bonds is $5\mathrm{.}89\%.$ Based on the bond$-$yield$-$plus$-$risk$-$premium approach, Taylor$$s cost of internal equity is:

$16\mathrm{.}54\%$

$20\mathrm{.}89\%$

$21\mathrm{.}76\%$

$17\mathrm{.}41\%$

The cost of equity using the discounted cash flow $($or dividend growth$)$ approach

Pierce Enterprises$$s stock is currently selling for $$32\mathrm{.}45$ per share, and the firm expects its per$-$share dividend to be $$2\mathrm{.}35$ in one year. Analysts project the firm$$s growth rate to be constant at $7\mathrm{.}27\%.$ Using the cost of equity using the discounted cash flow $($or dividend growth$)$ approach, what is Pierce$$s cost of internal equity?

$14\mathrm{.}51\%$

$18\mathrm{.}14\%$

$19\mathrm{.}59\%$

$13\mathrm{.}78\%$