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4. The cost of retained earnings If a firm cannot invest retained earnings to eam a rate of return it should return those funds to its stockholders the required rate of return on retained earnings, The cost of equity using the CAPM approach The current risk free rate of return (TAP) is 3.86% while the market risk premium is 5.75%. The Burns Company has a beta of 1.56. Using the capital asset pricing model (CAPM) approach, Burris’s cost of equity is The cost of equity using the bond yield plus risk premium approach The Lincoln Company is dosely held and therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company’s cost of internal equity. Lincoln’s bonds yield 11.529, and the firmos analysts estimate that the firm’s risk premium on its stock over its bonds is 5.89. Based on the bond-Vield-plus-risk-premium approach. Lincoln’s cost of internal equity is: 16.54% 17.41% O 19.15% 21.76%


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