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If a firm cannot invest retained earnings to earn a rate of return the required rate of return on retained eamings, it should return those

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If a firm cannot invest retained earnings to earn a rate of return the required rate of return on retained eamings, it should return those funds to its stockholders. The cost of equity using the CAPM approach The current risk-free rate of retum (fuir) is 3.86% while the market risk peemium is 6.17%, The Wilson Compamy has a beta of 1.56 . Using the capital asset pricing model (CAPM) approach, whions cost of equity is The cost of equity using the bond yield plus risk premium approach The Uncoin Company is closely heid and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity, Uncolny bends yeld 10.28%, and the firm's anolyss estimate that the firms risk premisum on its stock over its bonds is 5 . ag. Based on the bond-yeld-plus-risk-premium approach, lincoin's cost of internal equaty is: 15.36% 16.1796 17.79% 20.21% It is often difficult to estimate the expected future dividend growth rate for use in estimating the cost of existing equity using the OCF or DG approach. In general, there are three avaliable 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 modef. Suppose Tyler is currentiy distnbuting 40% of its earnings in the form of cash dividends. It has also historically generated an overage return on equity (ROE) of 14%. Tyer's estimated growth rate is W

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