The cost of raksing capital through retained earnings is the cost of raking capital through issuing new common stock. The cost of equity using the CAPM approach Thin current risk free rate of retum (ruw) is .3.86\% while the market risk premium is 5.75%. The Burris Company has a beta of 0.92 . Using the capital asse pricing model (CAPM) approach, Burris's cost of equity is The cost of equity using the bond vield plus risk premium opproach The Adams Company is closely held and, therefore, cannot generate reliable inpots with which to use the CAPM method for estimating a company's cost of internal equity, Adams's bonds vield 11.52%, and the firm's analysts estimate that the firm's rick premium on its stock over its bonds is 4.95%. Based on the bond-yiedd-plus-risk-premium approach, Adams's cost of linternal equity is: 20.59% 19.76% 16.42% 18,12% The cost of equity using the discounted cash flow (or dividend growth) approach Kirby Enterprises's stock is currently selling for $25.67 per share, and the firm expects its per-share dividend to be $1.38 in one year; Analysts project the firm's growth rate to be constant at 5.72%, Estimating the cost of equity using the discounted cash flow (or dividend growth) approsch, what is Kirby's cost of internal equity? 13.88% 11.66% 11.10% 14.99% Estimating growth rates It is often difficult to estimate the expected future dividend growth rate for use in estimating the cost of edisting equity using the DCF or DG approach. In gunerd, there are three avaltable methods to generate such an estim me: The Adams Company is dosely held and, therefore, cannot oenerate reliable inputs with which to use the CAPM method for estimating a company's cost of internal equity. Adams's bonds yield 11.52%, and the firm's analysts pstimate that the firm's risk premium on its stock over its bonds is 4.95%. Based on the bond-yield-plus-risk-premium approach, Adams's cost of internal equity is: 20.59% 16.4745 In.t2: The cost of equity using the discounted cash flow (or dividend growth) approsh Nurby tenterpilsesis stock is currenthy selling for $25.67 per share, and the firm expects its per-share dividend to be $1.38 in one vear, Analysts project the flum is grewth rate to be constant at 5.72%. Estimating the cost of equity using the discounted cash flow (or dividend growth) approach, what is wirby cost ef internal equity? 13.88% 1tises. 11.10% 14.99% Fstimating growith rates In generd, there we three avallable methods to generate such an estimate: - Carry forward a Nistorical realiued orowh rate, and apoly a te the future. - Locate and asply an erpected future gronth rate prepared and putished by secierity analysts. - Use the retenticn orawhi model. Suppose kity is currently distributing 75% of its earninos in the form of cash dividends, tt has also Nistoikally generated an average retum on equity (noe) of 144. Kirtors eutimated orowh rate is 4
