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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
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 The cost of equity using the CAPM approach The current risk-free rate of return (fkp) is 4.23% while the market risk premium is 6.63%. The Morgoe Company has a beta of 0.92 . Using the capital asset pricing model (CAPM) approach, Monroe's cost of ecuity is \begin{tabular}{l} The cost of equity using the bond yield plus risk premium 210.33% \\ The Lincoln Company is closely held and, therefore, cannot gener \\ cost of internal equity. Uncoln's bonds yleld 10.28%, and the firm 11.363% \\ 4.95%. Based on the bond-yield-plus-risk-premium approach, Lir 12.396% \\ \hline \end{tabular} puts with which to use the CAPM method for estimating a company's timate that the firm's risk premium on its stock over its bonds is 18.28% 19.04% 16.75% 15.23% The cost of equity using the bond yield plus risk premium approach The Uncoln 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. Lincoin's bonds yield 10.28%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 4.95%. Based on the bond-yield-plus-risk-premium approach, Uncoln's cost of internal equity is: 18.28% 19.04% 16.75% 15.23% The cost of equity using the discounted cash flow (or dividend growth) approach Pierce Enterprises's stock is currently selling for $45.56 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) approach, what is Pierce's cost of internal equity? 9.19% 10.94% 11.81% 8.75% Pierce Enterprises's stock is currently selling for $45.56 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) approach, what is Pierce's cost of internal equity? 9.19% 10.94% 11.81% 8.75% 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 DG approach. In general, there are three avaliable 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 Pierce is currently distributing 55% of its earnings in the form of cash dividends. It has also historically generated an average return on equity (ROE) of B\%. Pierce's estimated growth rate is \%. Suppose prerce is currenty aistributing 35% or its ear equity (ROE) of 8%. Plerce's estimated growth rate is the form of cash dividends. It has also historicall generated an average return on %
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