Question

the cost of raising capital through issuing The cost of raising capital through retained earnings is new common stock. greater than less than The cost of equity using the CAPM approach The current risk-free rate of return (TRF) is 4.67%, while the market risk premium is 5.75%. the Allen Company has a beta of 0.92. Using the Capital Asset Pricing Model (CAPM) approach, Allen's cost of equity is The cost of equity using the bond yield plus risk premium approach The Taylor 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. Taylor'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, Taylor's cost of internal equity is: 18.12% 16.47% 15.65% 19.76% The cost of equity using the discounted cashflow (or dividend growth) approach Pierce Enterprises's stock is currently selling for $32.45 per share, and the firm expects its per-share dividend to be $1.38 in one year. Analysts project the firm's growth rate to be constant at 5.72%. Using the cost of equity using the discounted cashflow (or dividend growth) approach, what is Pierce's cost of internal equity? 9.47% 9.97% 12.46% 10.47%

Answer 1

1. Cost of raising capital through retained earning will be much lesser than the cost of raising capital through common stocks because cost of retained earning would be completely zero as they are issued out of the funds which are held by the company, whereas issuance of new shares as common stock will be requiring various kinds of floatation cost.

Flotation cost will be increasing the cost of equity of the company whereas cost of retained earning is comparatively lowest due to Low payments to the outsiders.

So, it can be said that the cost of raising capital through retained earning is LESSER THAN the cost of raising capital through issuing new common stock.