True or False: It is free for a company to raise money through retained earnings, because retaned earnings represent money that is left over after dividends are paid out to sharehoiders. O False 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 4.30%, the market risk premium is 8.17%. and the Wison Company has a beta of 0.98. Using the Capital Asset Priding Model (CAPM) approach, Wilson's cost or equity is 12.93% 11.08% 14,77% 12.31% ost of equity using the bond yield plus risk premium approach in contrast, the Kennedy Company is closely held and, therefore, cannot generate reliable inputs with which to apply the CAPM method to estimate its cost of internal equity (retained earnings). However, its management knows that its outstanding bonds are currently yielding 9.88%, and the firm's analysts estimate that the risk premium oissos over its bonds is currently 1.80%. As rese, Kennedy's cost of intemal eauty (r)-based on the own-bond-yield-plus-judgemental-risk-premium approach-is: 12.85% 11.68% 14.02% 14.50% The cost of equity using the discounted cash flow (or dividend-yield-plus-growth-rate) approach Ford Enterprises's stock is currently selling for $22.75 per share, and the firm expects its per-share dividend to be $2.75 one year. Analysts project the firm's growth rate to be constant at 7.00%, using the discounted cash flow (or dividend-yield-plus-growth-rate) approach, what is Ford's cost of internal equity? MacBook Air 2 3 4 6 tab caps lock Module 10 Assignment- Determining the Cost of Capital The cost of equity using the discounted cash flow (or dividend-yleld-plus-growth-rate) approach Ford Enterprises's stock is aurrentily selling for $22.75 per share, and the firm expects its per-share dividend to be $2.75 in one year. Analysts project the firm's growth rate to be constant at 7.00%. Using the discounted cash flow or dividend-yield-plus-growth-rate) approach, what is Ford's cost of internal equity? 19.09% 25.77% O 18.14% 20.04% 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 dividend-yield-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 Ford Enterprises's is currently distributing 60% of its earnings as cash dividends. It has also histancahy generated an average return on equity (ROE) of 15.50% It is reasonable to estimate Ford's growth rate is 6.20% 15.10% 55.50% Continue without saving MacBook Air esc 4 6
