The cost of retained earnings

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 current risk$-$free rate of return $(r_{RF})$ is $3\mathrm{.}86\%$ while the market risk premium is $6\mathrm{.}63\%.$ The Allen Company has a beta of $0\mathrm{.}78.$ Using the capital

asset pricing model $($CAPM$)$ approach, Allen's cost of equity is

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

The Lincoln 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. Lincoln'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

$3\mathrm{.}55\%.$ Based on the bond$-$yield$-$plus$-$risk$-$premium approach, Lincoln's cost of internal equity is:

$18\mathrm{.}08\%$

$18\mathrm{.}84\%$

$15\mathrm{.}07\%$

$16\mathrm{.}58\%$