The risk-free rate of return is 3% and the expected return on the market portfolio is 14%. Oklahoma Oilco has a beta of 2.0 and a standard deviation of returns of 26%. Oilco's marginal tax rate is 35%. Analysts expect Oilco's net income to grow by 12% per year for the next 5 years. Using the capital asset pricing model, what is Oklahoma Oilco's cost of retained earnings?A) 25.0% B) 22.8% C) 21.2% D) 18.6%

Based on the information given Oklahoma Oilco's cost of retained earnings is A) 25.0%.

Using this formula

Retained earnings = Risk free return + Beta × Risk premium

Let plug in the formula

Retained earnings=  3% + 2 × (14% - 3%)

Retained earnings=  3% + 2 × 11%

Retained earnings=  3% + 22%

Retained earnings= 25%

Inconclusion Oklahoma Oilco's cost of retained earnings is A) 25.0%.

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25%

Explanation:

Data provided

Risk free return = 3%

Beta = 2

Expected return on the market portfolio = 14%

Risk-free rate of return = 3%

The computation of cost of retained earnings is shown below:-

Cost of retained earnings = Risk free return + Beta × Risk premium

=  3% + 2 × (14% - 3%)

=  3% + 2 × 11%

=  3% + 0.22

= 25%

Therefore, for computing the cost of retained earning we simply applied the above formula.

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