The risk free rate of return is 2% and the market risk premium is 10%. Twindle I

Question

The risk free rate of return is 2% and the market risk premium is 10%. Twindle Industries has a beta of 1.5 and a standard deviation of returns of 18%. Twindle's marginal tax rate is 35%. Analyst's expect Twindle's dividends to grow by at least 5% per year for the next 5 years. Using the capital asset pricing model, what is Twindle's cost of retained earnings? 12% 13% 17% 14% Jones Company has a target capital structure of 40% debt, 10% preferred stock, and 50% common equity. The company's after-tax cost of debt is 8%, its cost of preferred stock is 10%, its cost of retained earnings is 14%, and its cost of new common stock is 16%. The company stock has a beta of 1.2 and the company's marginal tax rate is 35%. What is the company's weighted average cost of capital if retained earnings are used to fund the common equity portion? 16.80% 8.00% 11.20% 6.72%

Explanation / Answer

17%

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