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mote1985 [20]
3 years ago
6

The risk free rate of return is 2.5% and the market risk premium is 8%. Rogue Transport has a beta of 2.2 and a standard deviati

on 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. 20.1%
c. 16.4%
d. 19.6%
Business
1 answer:
4vir4ik [10]3 years ago
6 0

Answer:

20.1%

Explanation:

In capital asset prcing model (CAPM), cost of equity (or cost of retained earnings in this context) is calculated as below:

<em>Cost of equity = risk-free rate of return + beta x (market index return - risk-free rate of return)</em>

Please note that <em>(market index return - risk-free rate of return)</em> is equal to <em>market risk premium</em>

Putting all the number together, we have:

Cost of equity/retained earnings = 2.5% + 2.2 x 8% = 20.1%

<em>Note: The dividend growth rate, tax rate & stock standard deviation is not relevant in answering the question.</em>

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\bar X=2500 represent the sample mean

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