estimating the cost of equity by use of the bond-yield-plus-risk-premium method, we can generally get a good idea of the interest rate on new long-term debt, but we cannot be sure that the risk premium we add is appropriate This problem leaves us unsure of the true value of rs.

Question

Quizplus · Accepted Answer

The statement correctly describes the limitations of the bond-yield-plus-risk-premium method for estimating the cost of equity. While this method can give us an estimate of the interest rate on new long-term debt, the accuracy of the risk premium used is uncertain, leading to uncertainty in the estimated cost of equity (rs).

Estimating the Cost of Equity by Use of the Bond-Yield-Plus-Risk-Premium