True or False: It is free for a company to raise money through retained earnings, because retained earnings represent money that is left over after dividends are paid out to shareholders.

True

False

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Explanation:

The current risk-free rate of return is 3.80% and the current market risk premium is 6.10%. Blue Hamster Manufacturing Inc. has a beta of 1.56. Using the Capital Asset Pricing Model (CAPM) approach, Blue Hamsters cost of equity is selector 1

13.99%

14.65%

13.32%

17.32%

.

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Explanation:

Fuzzy Button Clothing Company is closely held and, as a result, cannot generate reliable inputs for the CAPM approach. Fuzzy Buttons bonds yield 10.20%, and the firms analysts estimate that the firms risk premium on its stock relative to its bonds is 3.50%. Using the Bond-Yield-plus-Risk-Premium approach, the firms cost of equity is selector 1

13.01%

17.13%

13.70%

15.07%

.

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Explanation:

The stock of Cute Camel Woodcraft Company is currently selling for $25.67, and the firm expects its dividend to be $1.38 in one year. Analysts project the firms growth rate to be constant at 7.20%. Using the discounted cash flow (DCF) approach, Cute Camels cost of equity is estimated to be...

16.98%

13.21%

12.58%

11.95%

.

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Explanation:

It is often difficult to estimate the expected future dividend growth rate for use in estimating the cost of existing equity using the DCF 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 Cute Camel Woodcraft Company is currently distributing 70.00% of its earnings in the form of cash dividends. It has also historically generated an average return on equity (ROE) of 12.00%. Cute Camel Woodcraft Companys estimated growth rate is...

11.70%

3.60%

12.30%

42.00%

.