The cost of common equty is based on the rate of retum that investers require on the company's common stock. New common equity is ralsed in two ways: (1) by retaining same of cost, rs. than equity raised from retained earninas, r.w due to It is true that no eirect costr are assotated whth retained earnings, this capital still has a cost, a(n) cost. The firm's aher-tax earnings belong to its stockholders, and these eamings serve to compensate them for the use of their capitat. The earnings can either be paid out in the form of dividendi to stockholders who could have invested this money in altemative investments or retained for reilfvestment in the firm. Therefore, the firm needs to earn at ieast as much on any eamings retained as the stockhoiders could earm in stods or other assets that will provide that retum. There are three procedures that can be used to estimate the cost of retained eamings: the Capitat Asset Pricing Model (CAPM). CAnin drershed, but if thery are diversined, then the fimis the inestment nak would not be mientired by sind the curm estimate wovit thil comect value of r. prembin Note the pis nuk premium is entintate peF The DCF approach for eatimated the cots of retained earnings, F,is given as follows: Investon expect to recelve a dividens yeld, F1P2, plus a captal gain, g, for a total expected feturn, in this expected return is also equalto the required retum, ith any to calcuiate the dividend yleld; but because stock prices fluctuate, the vield varies from day to day, which le ods to fluctuations in the DCF cost of equity. Also, it is dificuil to regularly forecait growth nates of earnings and dividends. Which method should be zised to entimate r2 ? it management has coofidence in one methed, would probably use that method's estimate, Otherwise, it might use some weighted average of the three methods. Judement is important and comes into play here, as is true for most decalons in finance. equity using each of these three approaches? Round vour answers to two decimal places. What is your best nstimate of the fimm's cost of equir? The cost of common equty is based on the rate of retum that investers require on the company's common stock. New common equity is ralsed in two ways: (1) by retaining same of cost, rs. than equity raised from retained earninas, r.w due to It is true that no eirect costr are assotated whth retained earnings, this capital still has a cost, a(n) cost. The firm's aher-tax earnings belong to its stockholders, and these eamings serve to compensate them for the use of their capitat. The earnings can either be paid out in the form of dividendi to stockholders who could have invested this money in altemative investments or retained for reilfvestment in the firm. Therefore, the firm needs to earn at ieast as much on any eamings retained as the stockhoiders could earm in stods or other assets that will provide that retum. There are three procedures that can be used to estimate the cost of retained eamings: the Capitat Asset Pricing Model (CAPM). CAnin drershed, but if thery are diversined, then the fimis the inestment nak would not be mientired by sind the curm estimate wovit thil comect value of r. prembin Note the pis nuk premium is entintate peF The DCF approach for eatimated the cots of retained earnings, F,is given as follows: Investon expect to recelve a dividens yeld, F1P2, plus a captal gain, g, for a total expected feturn, in this expected return is also equalto the required retum, ith any to calcuiate the dividend yleld; but because stock prices fluctuate, the vield varies from day to day, which le ods to fluctuations in the DCF cost of equity. Also, it is dificuil to regularly forecait growth nates of earnings and dividends. Which method should be zised to entimate r2 ? it management has coofidence in one methed, would probably use that method's estimate, Otherwise, it might use some weighted average of the three methods. Judement is important and comes into play here, as is true for most decalons in finance. equity using each of these three approaches? Round vour answers to two decimal places. What is your best nstimate of the fimm's cost of equir
