Methods of Estimating a Company's Cost of Retained Earnings

C

The Capital Asset Pricing Model (CAPM), Discounted Cash Flow (DCF method), and Bond-Yield-plus- Risk-Premium methods may all be used to estimate a firm's

Cost of Retained Earnings.

The correct answer is C. I, III & IV.

Let's go through each option and explain whether it is a method of estimating a company's Cost of Retained Earnings:

I. CAPM (Capital Asset Pricing Model): CAPM is a widely used method for estimating the cost of equity. It calculates the required return on equity based on the risk-free rate, the company's beta (a measure of systematic risk), and the market risk premium. The cost of retained earnings can be estimated using CAPM as it represents the return required by investors to compensate for the risk of holding the company's stock. Therefore, option I is correct.

II. CANSLIM: CANSLIM is not a method of estimating a company's cost of retained earnings. It is actually an investment strategy developed by William J. O'Neil, which focuses on identifying growth stocks based on a combination of fundamental and technical analysis. Therefore, option II is incorrect.

III. DCF Method (Discounted Cash Flow): The DCF method is commonly used to estimate the intrinsic value of a company or its equity. It involves forecasting future cash flows and discounting them back to present value using an appropriate discount rate. When estimating the cost of retained earnings, the DCF method can be used to calculate the cost of equity by discounting the expected future dividends or free cash flows to equity. Hence, option III is correct.

IV. Bond-Yield-plus-Risk-Premium: This method is not specifically used to estimate a company's cost of retained earnings. It is typically used to estimate the cost of debt, where the yield on a company's bonds is used as a starting point and a risk premium is added to reflect the additional risk associated with the company's debt. Therefore, option IV is incorrect.

V. Least Cost Debt vs. Equity: This option does not represent a specific method for estimating the cost of retained earnings. It seems to refer to a decision-making process regarding the capital structure of a company, weighing the costs of debt and equity. However, it does not provide a direct method of estimating the cost of retained earnings. Therefore, option V is incorrect.

In summary, the methods of estimating a company's cost of retained earnings from the given options are I. CAPM, III. DCF Method, and IV. Bond-Yield-plus-Risk-Premium. Therefore, the correct answer is C. I, III & IV.