Question

I. If a firm cannot invest retained earnings to earn a rate of return (less than/greater than or equal to) the required rate of return on retained earnings, it should return those funds to its stockholders.

II. The current risk-free rate of return is 3.80% and the current market risk premium is 6.60%. Blue Hamster Manufacturing Inc. has a beta of 1.56. Using the Capital Asset Pricing Model (CAPM) approach, Blue Hamster’s cost of equity is (18.33%/15.51%/14.81%/14.10%)

III. Fuzzy Button Clothing Company is closely held and, as a result, cannot generate reliable inputs for the CAPM approach. Fuzzy Button’s bonds yield 11.50%, and the firm’s analysts estimate that the firm’s risk premium on its stock relative to its bonds is 4.50%. Using the bond-yield-plus-risk-premium approach, the firm’s cost of equity is (20.00%/17.60%/19.20%/16.00%).

IV. The stock of Cute Camel Woodcraft Company is currently selling for $32.45, and the firm expects its dividend to be $1.38 in one year. Analysts project the firm’s growth rate to be constant at 5.70%. Using the discounted cash flow (DCF) approach, Cute Camel’s cost of equity is estimated to be (10.45%/13.43%/12.44%/9.95%) .

Answer 1