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4. The cost of retained earnings True or False: It is free for a company to raise money through retained earnings, because re

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Answer #1
Answer 4.1
It is free for a company to raise money through retained earnings, because retained earnings represent money that is left over dividend are paid out to shareholders.
The above statement is false, though company have paid dividend to shareholders the retained earnings is part of shareholders capital and it is not free and the expected return on total shareholders capital is called as cost of equity.
Answer 4.2
CAPM Formula
Cost of equity = Risk free rate + Security Beta * ( Market return - risk free rate )
= 4.67 + 1.56 * (5.75)
=13.64%
Answer 4.3
Bond Yield Plus Risk Premium Formula
Cost of equity = Bond Yield + Equity Market Premium
=11.52%+5.89%
=17.41%
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