Question

5. The cost of retained earnings Aa Aa E If a firm cannot invest retained earnings to earn a rate of return greater than or equal to return on retained earnings, it should return those funds to its stockholders. the required rate of The cost of equity using the CAPM approach The current risk-free rate of return (TRF) is 3.86%, while the market risk premium is 5.75%. the Roosevelt Company has a beta of 0.92. 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 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: O 20.59% O 16.47% O 19.76% 18.12% Goog

Answer 1

А Ε 1 в CAPM Risk free rate MRP Beta Cost of equity 3.86% 5.75% 0.92 9.15% Bond yield plus risk premium approach Bond yield 11.52% Risk premium 4.95% Cost of equity 16.47% 10 11 12 13 14 Discounted cash flow approach price 32.45 DPS 2.35 Growth 5.72% Cost of equity 12.96% 18 19 ROE Retention ratic Growth rate 14% 40.00% 5.60% 20 21 22

D18 A Hum wooo: CAPM Risk free rate MRP Beta Cost of equity 0.0386 0.0575 0.92 =C2+C3*C4 Bond yield plus risk premium Bond yield 0.1152 Risk premium 0.0495 Cost of equity =SUM(C8:09) Discounted cash flow approa price 32.45 DPS 2.35 Growth 0.0572 Cost of equity =C14/C13+C15 16 17 18 19 ROE Retention ratio Growth rate 0.14 =(1-60%) =C18*019 21 22