Question

please complete all parts to the question

4. The cost of retained earnings the required rate of return on retained earnings, it If a firm cannot invest retained earnings to earn a rate of return should return those funds to its stockholders, The cost of equity using the CAPM approach The current risk-free rate of return (TRF) is 4.23% while the market risk premium is 5.75%. The Jefferson Company has a beta of 1.56. Using the capital asset pricing model (CAPM) approach, Jefferson'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 5.89, Based on the bond-yield-plus-risk premium approach, Adams's cost of internal equity is 19.15% 16.54% 17.41% 21.76%

Answer 1

First option is greater than or equal to

CAPM approach = rf + beta * market risk premium

= 4.23% + 5.75% * 1.56

= 13.2%

Adam's cost of internal equity = bond's yield + firm's risk premium on its stock over its bonds

= 11.52% + 5.89%

= 17.41%

Grant's cost of internal equity = dividend/stock price + firm's growth rate

= 2.35/25.67 + 7.27%

= 16.42%