The cost of raisino capital through retained earnings is the cost of raising capital through issuing new common stock. The cost of equity using the CAPM approach The current risk-free rate of return (ray) is 4.67% while the market risk premium is 5.17%. The D'Amico Company has a beta of 1.56. Using the capital assiet pricing model (CAPM) approach, D'Amico's cost of equity is The cost of equity using the bond yield plus risk premium approach The Taylor Company is dosely held and, therefore, cannot generate reliable inputs with which to use the CAPM mothod for estimating a company's cost of intemal equity. Taylor's bonds vield 11.52%, and the firm's analysts estimate that the firm's risk premium an its stock over its bonds is 5.89. Based on the bond-yield-plus-risk-premium approach, Taylor's cost of internal equity is: 17.41% 19.15% 20.89% 16.54% The cost of equity using the discounted cash flow (or dividend growth) approach The cost of equity using the discounted cash flow (or dividend orowth) approach Pierce Enterprises's stock is currently selling for $45.56 per share, and the firm expects its per-share dividend to be $2.35 in one year. Anafysti project the firm's orowth rate to be constant at 7.27\%. Eistimating the cost of equity using the discounted cash flow (or dividend growh) approach, what is Pierce's cost of intesnal equity? Estimating growth rates It is often ditficult to estimate the expected future dividend growth rate for use in estimating the cost of existino equity using the bcl or Dec approsch. In general, there are three ivailable methods to oenerate such an estimate: - Carry forward a hietorical 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 model. 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 DG approach. in qeneral, there are three available methods to generate such an estimate: - Carry forward a historical realized orowth rate, and apply it to the future. - Locate and apply an expected future growth nate prepared and published by security analysts. - Use the retention growth model. Suppose Pherce is currently distributing 45% of its eamings in the form of cash dividends, It has also historically generated an average retum on equity (ROE) of 10%. Pierce's estimated orowth rate is