Short-term US Treasury Bills yield 6%, the market's current yield is 14%, and a company's beta is 1.2. According to the CAPM approach, the estimated cost of retained earnings is 15.6%.

Question

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According to the Capital Asset Pricing Model (CAPM), the cost of equity (or retained earnings) is calculated as the risk-free rate plus the product of the company's beta and the market risk premium. Here, the risk-free rate is 6%, the market's risk premium is 14% - 6% = 8%, and the company's beta is 1.2. Thus, the cost of retained earnings is 6% + 1.2 * 8% = 15.6%.

Short-Term US Treasury Bills Yield 6%, the Market's Current Yield