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2. When calculating a firm's cost of capital, why is there a cost associated with retained earnings? (6 points)

3. Why should a firm be concerned if its accounts receivable turnover ratio is unusually high, compared to the industry norm? (10 points)

2 Approved Answers

Mark B
3 Ratings, (9 Votes)
Cost of retained earnings (ks) is the return stockholders require on the company's common stock. There are three methods one can use to derive the cost of retained earnings: a) Capital-asset-pricing-model (CAPM) approach b) Bond-yield-plus-premium approach c) Discounted cash flow approach a)CAPM Approach To calculate the cost of capital using the CAPM approach, you must first estimate the risk-free rate (rf), which is typically the U.S. Treasury...

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