29.) The risk free rate of return is 2.5% and the market return is 8%. Rogue Tra

Question

29.) The risk free rate of return is 2.5% and the market return is 8%. Rogue Transport has a beta of 2.2 and a standard deviation of returns of 28%. Rogue Transport's marginal tax rate is 35%. Analysts expect Rogue Transport's dividends to grow by 6% per year for the foreseeable future. Using the capital asset pricing model, what is Rogue Transport's cost of retained earnings?

Select one:

a. 17.7%

b. 19.6%

c. 14.6%

d. 16.4%

34.) Which of the following should NOT be considered when calculating a firm's WACC?

Select one:

a. cost of newly issued preferred stock

b. after-tax cost of accounts payable

c. cost of newly issued common stock

d. after-tax YTM on a firm's bonds

Explanation / Answer

29. Cost of retained earning = risk free rate + beta * (market return - risk free rate)

= 2.5% + 2.2 * (8% - 2.5%)

= 14.6% which is option (c)

34. (b) after-tax cost of accounts payable

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