Butcher Timber Company hired your consulting firm to help them estimate the cost of equity. The yield on the firm's bonds is 8.75%, and your firm's economists believe that the cost of equity can be estimated using a risk premium of 3.85% over a firm's own cost of debt. What is an estimate of the firm's cost of equity from retained earnings?

Question

Quizplus · Accepted Answer

The cost of equity from retained earnings is the yield on the firm's bonds plus the risk premium. In this case, the yield on the firm's bonds is 8.75% and the risk premium is 3.85%, so the cost of equity from retained earnings is 8.75% + 3.85% = 12.60%.

Butcher Timber Company Hired Your Consulting Firm to Help Them