Question

4. The cost of retained earnings 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. False O True The cost of equity using the CAPM approach The current risk-free rate of return (rRF) is 4.67% while the market risk premium is 6.17%. The D'Amico Company has a beta of 0.92. Using the capital asset pricing model (CAPM) approach, D'Amico's cost of equity is The cost of equity using the bond yield plus risk premium approach The Adams 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. Adams's bonds yield 11.52%, 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, Adams's cost of internal equity is: 20.59% O15.65% O 19.76% 16.47%

Answer 1

rate positively .. let me know if you need any clarification..

Ans 1
	Statement is Flase
	Even retained earning has cost of capital
Ans 2	Rf =	4.67%
	Risk premium =	6.17%
	Beta =	0.92
	required rate = Rf+risk premium *beta
		4.67%+6.17%*0.92
		10.35%
Ans 3
	Cost of equity = Bond yield + risk premium
		11.52%+4.95%
		16.47%
	Ans =	16.47%
Ans 4	Using DDM cost of equity =
		D1/Po + growth rate
	D1	1.38
	Po=	45.56
	growth rate =	7.27%
	Cost of equity =	1.38/45.56+7.27%
		10.30%
	ans =	10.30%
Ans 5	Growth rate = ROE *(1-dividend payout rate)
		10%*(1-45%)
		5.50%