For Newco, assume rf = 4%, rm = 15% and bi = 1.1. What is the cost of retained earnings for Newco using the CAPM approach?
ks = rf + bi (rm - rf) = 4% + 1.1(15%-4%) = 16.1%
b) Bond-Yield-Plus-Premium Approach
To estimating the cost of retained earnings. Simply take the interest rate of the firm's long-term debt and add a risk premium (typically three to five percentage points):