Problem:
The risk free rate of return is 2.5% and the market risk premium is 8%. Penn Trucking has a beta of 2.2 and a standard deviation of returns of 28%. Penn Trucking's marginal tax rate is 35%. Analysts expect Penn Trucking's dividends to grow by 6% per year for the foreseeable future.
Required:
Question: Using the capital asset pricing model, what is Penn Trucking's cost of retained earnings?
Note: Explain all calculation and formulas.