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True or False: It is free for a company to ralse money through retained earnings, because retained eamings represent money that is left over after
True or False: It is free for a company to ralse money through retained earnings, because retained eamings represent money that is left over after dividends are paid out to shareholders. True False The cost of equity using the CAPM approach The yield on a three-month T-bill is 4%, the yield on a 10 -year T-bond is 5.36%. The market risk premium is 10.18% and the Monroe Company has a beta of 1.25. Using the Capital Asset Pricing Model (CAPM) approach, Monroe's cost of equity is The cost of equity using the bond yield plus risk premium approach In contrast, the Hoover Company is closely held and, therefore, cannot generate reliable inpult with which to apply the CAPM method to estimate its cost of internal equity (retained eamings). However, its management knows that its outstanding bonds are currently ylelding 12.31%, and the firm's analysts estimate that the risk premium of its stocks over its bonds is currently 2.31%. As result, Hoover's cost of internal equity ( rx)ba sed on the own-bond-yield-plus-judgemental-risk-premium approach-is: 14.62% 17.54% 18.27% 13.89% The cost of equity using the discounted cash flow (or dividend-yield-plus-growth-rate) approach Grant Enterprises's stock is currently selling for $19.50 per share, and the firm expects its per-share dividend to be $3.25 in one year, Analysts project the firm's growth rate to be constant at 5.40%. Using the discounted cash flow (or dividend-yleld-plus-growth-rate) approach, what is Grant's cost of internal equity? 29.79% 22.07% 18.76% 20.97% 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 dividendyield-plus-growth-rate) 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 publis - Use the retention growth model. Suppose Grant Enterprises's is currently distributing 40% of its earnings as equity (ROE) of 15,50%. It is reasonable to estimate Grant's growth rate is
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