The cost of retained earnings The cost of raising capital through retained earnings is the cost of raising capital through issuing new common stock. The cost of equity using the CAPM approach The yield on a three-month T-bill is 3%, the yield on a 10-year T-bond is 3.88\%. The market risk premium is 7.37% and the Jefferson compan beta of 1.00. Using the Capital Asset Pricing Model (CAPM) approach, Jefferson's cost of equity is The cost of equity using the bond yleld plus risk premium approach In contrast, the Taylor Company is closely held and, therefore, cannot generate rellable inputs with which to apply the CapM method to estimate cost of internal equity (retained earnings). However, its management knows that its outstanding bonds are currently yielding 8.91%, and the firm analysts estimate that the risk premium of its stocks over its bonds is currently 1.85%. As result, Taylor's cost of internal equity (r), based on th own-bond-yield-plus-judgdmental-risk-premlum approach-is: 10.22% 10.76% 13.45% 12.91% The cost of equity using the discounted cash flow (or dividend-yleld-plus-growth-rate) approach Pierce Enterprises's stock is currently selling for $24.50 per share, and the firm expects its per-share dividend to be $3.50 in one year. Analysts project the firm's growth rate to be constant at 6.40%. Using the discounted cash flow (or dividend-yleld-plus-growth-rate) approach, what is Pierce's cost of internal equity? 19.66%20.69%27.93%17.59% Estimating growth rates It is often difficuit to estimate the expected future dividend growth rate for use in estimating the cost of existing equity using the DCF (or dividendyield-plus-growth-rate) approach. In general, there are three available 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 model. Suppose Plerce Enterprises's is currenty distributing 60% of its earnings as cash dividends. It has also tistorically generated an average return on equity (ROE) of 10.50%. It is reasonable to estimate Pierce's growth rate is