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The US government T-bill has a yield of 0.02, the Wilshire 5000 is expected to yield...

The US government T-bill has a yield of 0.02, the Wilshire 5000 is expected to yield 0.09, and a stock's beta is 1.0. If inflation is expected to increase by 0.03 next year, but everything else remains the same, what will the new cost of retained earnings be?

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Answer #1

Cost of Retained Earnings =Inflation+Risk Free Rate +Beta*(Market Return-Risk free Rate) =0.02+1*(0.09-0.02)+0.03 =12%

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