GPS Inc.wishes to estimate its cost of retained earnings.The firm's beta is 1.3.The rate on 6-month T-bills is 2%,and the return on the S&P 500 index is 15%.What is the appropriate cost for retained earnings in determining the firm's cost of capital?

Question

Quizplus · Accepted Answer

The cost of retained earnings can be estimated using the Capital Asset Pricing Model (CAPM): Cost of Retained Earnings = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Substituting the given values: 2% + 1.3 * (15% - 2%) = 18.9%.

GPS IncWishes to Estimate Its Cost of Retained Earnings