Question

5. The cost of retained earnings Aa Aa the required rate of If a firm cannot invest retained earnings to earn a rate of return less than return on retained earnings, it should return those funds to its stockholders. The cost of equity using the CAPM approach The current risk-free rate of return (RF) is 4.67%, while the market risk premium is 6.17%. the Roosevelt Company has a beta of 1.56. Using the Capital Asset Pricing Model (CAPM) approach, Roosevelt's cost of equity is The cost of equity using the bond yield plus risk premium approach The Harrison 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. Harrison's bonds yield 10.28%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 5.89. Based on the bond-yield-plus-risk-premium approach, Harrison's cost of internal equity is: 16.17% O 19.40% 15.36% 17.79%

Answer 1

If a firm cannot invest retained earnings to earn a rate of return greater than the required rate of return on retained earnings it should return those funds to its stockholders.

2nd part:

cost of equity using CAPM = risk free rate+ beta*(risk premium)

=>4.67%+ 1.56*(6.17%)

=>14.2952%

=>14.30%....(rounded to two decimals).

3rd part

A.16.17%.

cost of internal equity = yiled + risk premium =>10.28%+5.89%

=>16.17%.

4th part:

b.9.97%.

internal cost of equity can be known using the following formula:

dividend next year / price + growth rate

=>1.38 /32.45 + 0.0572

=>0.04252696+0.0572

=>0.09972696

=>9.97%