please answer completely and correctly all questions thanks quiz probGuid-QNAPC0
ID: 2779759 • Letter: P
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please answer completely and correctly all questions thanks
quiz probGuid-QNAPC0A80101 00008tcb 4. The cost of retained earnings Aa Aa True or False: It is free for a company to raise money through retained earnings, because retained earnings represent money that is left over after dividends are paid out to shareholders O True O False The cost of equity using the CAPM approach The arrent risk-free rate of return (rw) is 386%, while the market risk premirnis 617%, the wison Company has a beta of 0.78. Using the Capital Asset Pricing Model (CAPM) approacth, Wilson's cost of equity is The cost of equity using the bond yield plus risk premium approach The Kennedy 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. Kennedy's bonds yield i 1.52%,and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 3.55%. Based on the bond-yield-plus-risk-premium approach, Kennedy's cost of internal equity is: o 15.07% 14.32% o 18.84% o 18.08% The cost of equity using the discounted cashflow (or dividend growth) approach Pierce Enterprisess stotk is currently seling for $45.56 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 7.27%, Using the ast of equity using the discounted cashflow (or dividend growth) spproach, what is Pierce's cost of internal equ o 10.82% o 10.30% 13.91% 9.79%.Explanation / Answer
4. The cost of Reatined Earnings: False
CAPM Approach:
Cost of Equity (Re) = Risk Free Rate (Rf) + (Expected Market Return (Rm) - Risk Free Rate (Rf) )
Market Risk Premium = (Expected Market Return (Rm) - Risk Free Rate (Rf) )
Re = 3.86 + 0.78 (6.17)
= 8.6726
Bond Yiled Plus risk Premum Approach:
Cost of Equity = long-term bond yield + risk premium
= 11.52 + 3.55
= 15.07% (Option A)
Discounted Cashflow (or Dividend Growth) Approach:
Cost of Equity = (Dividend/Price) + Growth
= (1.38/45.56) + 7.27
= 3.03 + 7.27
= 10.30 % (Option B)
Estimating Growth Rates
Growth Rate (g) = (1-Payout Rate) * ROE
= (1-0.75) * 0.16
= 4 %
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