The Yo-Yo Corporation tries to determine the appropriate cost for retained earni

Question

The Yo-Yo Corporation tries to determine the appropriate cost for retained earnings to be used in capital budgeting analysis. The firm's beta is 1.85. The rate on six-month T-bills is 3.26%, and the return on the S&P; 500 index is 6.74%. What is the appropriate cost for retained earnings in determining the firm's cost of capital? Round the answers to two decimal places in percentage form. Write the percentage sigy in the "wnits box) Your Answer: Answer units Save Page 5 of 6 Next Page Save All Responses Go to Submit Quiz

Explanation / Answer

Risk free rate = 3.26%

Beta risk = 1.85

Market return = 6.74%

Cost of Retained Earnings is calculated below using CAPM formula:

Cost of Retained earnings = Risk free rate + (Market Return - Risk free rate) × Beta

                        = 3.26% + (6.74% - 3.26%) × 1.85

                        = 3.26% + (3.48% × 1.85)

                        = 3.26% + 6.438%

                        = 9.698%

Cost of Retained Earnings is 9.698%.  

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