Question

please complete last part of the problem (estimating growth rates)

added extra pictures so you can see answer choices

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 greater than or equal to 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 13.20% 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% O 17.41% 21.76%

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

- 2x Σ AutoSum : A Fill 2 Clear Sort & Filter Editing Find & Select ke - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri -11AA = = = Dr Wrap Text General Ea Copy Paste B I U B- E A E E s FMerce Merge & Center - Center $ -% % Format Painter 4.0 .00 . Conditional Format Cell Insert Delete Format Formatting as Table Styles Clipboard Font Alignment Number Styles Cells CE506 fax BZ I CA СВ CC CD E ANS 1 GREATER THAN OR EQUAL TO 499 ANS 2 CAPM APPROACH 501 ke = Rf + beta(Rm-Rf) Rm-Rf = RISK PREMIUM = 5.75%, Rf =4.23% 502 ke = 4.23% + 1.56(5.75%) = 13.20% F G CHE 498 500 503 ANS 3 BOND YIELD PLUS APPROACH ke = BOND RATE + RISK PREMIUM ke = 11.52% + 5.89% = 17.41% 504 505 506 507 508 509 ANS 4 DISCOUNTED CASH FLOW APPROACH D1 = 2.35, PO =25.67, g = 7.27% 510 ke = D1/PO+g ke = 2.35/25.67 +0.0727= 16.42% 511 512 513 514 ANS 5 GROWTH RATE = RETENTION RATIO X ROE = b X ROE GROWTH RATE = 55% X 18% = 9.90% DIVIDEND PAYOUT = 45%, SO RETENTION RATIO = 55% 515 516 convexity DGM betaport future INDEX INTL CAP BUD LEASING PV, FV, ANNUITY DIR right clean YIELD bond portfolio K E CAPM UTILITY, SHARPE, beta ferences: A1310 cap stru WACC BOI 130% Rea RESI el 20- ENG 08345 05-11-2019 DE *