ng.cengage.com/static/mbu/index.htmil mbld-572827nbNodeld 207595027deploymentid
ID: 2788395 • Letter: N
Question
ng.cengage.com/static/mbu/index.htmil mbld-572827nbNodeld 207595027deploymentid 551651301746505011 5% MINDTAP Assignment 10-The Cost of Capital 0 Due Tomorrow at 11 PM CST Back to Assignment Attempts 5. The cost of retained earnings If a firm cannot invest retained earnings to earn a rate of return return on retained earnings, it should return those funds to its st Do No Harm: Aa Aa the required rate of greater than or equal to less than The cost of equity using the CAPM approach The current risk-free rate of return (rRF) is 4.23%, while the market risk premium is 5,75%, the Jefferson Company has a beta of 0.92. Using the Capital Asset Pricing Model (CAPM) approach, Jefferson's cost of equity is The cost of equity using the bond yield plus risk premium approach The Jackson Company is closely held and, therefore, cannot generate reliable inpats with which to use the CAPM method for estimating a company's cost of internal equity. Jackson's bonds yield 10.28%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 4.95%. Based on the bond-yield-plus-risk-premium approach, Jackson's cost of internal equity is: 15.23% O 19.04% O 18.28% O 14.47%Explanation / Answer
5.
a) The company should distribute the return to shareholders if the company is not earning greater then or equal to required rate of return. So that the share holder can invest those funds elsewhere to earn a better return.
b) As per CAPM , ke = rf + Beta(rm -rf )
So ke =.0423 +( .92 * .0575) = 9.52 %
c) Ke using bond yield plus risk premium approach is = 10.28+4.95 = 15.23 %
d)
P0 = D1 / ke -g
45.56 = 1.38 / Ke - .0727
or 45.56 K e - 3.31 = 1.38
or Ke = 10.30 %
e)
Growth Rate (g) = Retained Earning * Return on Capital Employed
So (1-.60) * .08 = 3.20 %
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