Given the following, compute the cost of internally generated equity (retained e

Question

Given the following, compute the cost of internally generated equity (retained earnings) using the CAPM approach: The par value of the firms outstanding 20 year 8% annual coupon debt is 1,000 and the debt currently has a market value of 800. The firm's tax rate is 30%. The current dividend (just paid) is 2.00. The dividend growth rate is 3%. The current stock price is 20.00. New equity flotation costs are 10%. The risk free rate is 4%. The market risk premium (Market return - Risk free rate) is 6%. The security beta is 2.

Explanation / Answer

Given the following, compute the cost of internally generated equity (retained e

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