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 True The current risk-free rate of return is 4.60% and the current market risk premium is 5.70%. Green Caterpillar Garden Supplies Inc. has a beta of 1.56. Using the Capital Asset Pricing Model (CAPM) approach, Green Caterpillar's cost of equity is Cute Camel Woodcraft Company is closely held and, as a result, cannot generate reliable inputs for the CAPM approach. Cute Camel's bonds yield 11.50%, and the firm's analysts estimate that the firm's risk premium on its stock relative to its bonds is 4.50%. Using the bond-yield-plus-risk- premium approach, the firm's cost of equity is The stock of Cold Goose Metal Works Inc. is currently selling for $32.45, and the firm expects its dividend to be $2.35 in one year. Analysts project the firm's growth rate to be constant at 5.70%. Using the discounted cash flow (DCF) approach, Cold Goose's cost of equity is estimated to be

Answer 1

Statement is False Cost of equity 13.49% -4.6%+1.56*5.7% Bond yield plus risk premium 16.00%|=11.5%+4.5% Cost of internal equity 12.94% =2.35/32.45+5.7%

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