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n contrast, the Lincoln Company is closely held and, therefore, cannot generate reliable inputs with...

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Finance

n contrast, the Lincoln Company is closely held and, therefore, cannot generate reliable inputs with which to apply the CAPM method to estimate its cost of internal equity (retained earnings). However, its management knows that its outstanding bonds are currently yielding 10.37%, and the firms analysts estimate that the risk premium of its stocks over its bonds is currently 1.62%. As result, Lincolns cost of internal equity (rs

)based on the own-bond-yield-plus-judgemental-risk-premium approachis:

11.99%

14.39%

11.39%

14.99%

The cost of equity using the discounted cash flow (or dividend-yield-plus-growth-rate) approach

Grant Enterprisess stock is currently selling for $21.00 per share, and the firm expects its per-share dividend to be $2.25 in one year. Analysts project the firms growth rate to be constant at 4.40%. Using the discounted cash flow (or dividend-yield-plus-growth-rate) approach, what is Grants cost of internal equity?

20.40%

14.35%

12.84%

15.11%

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