A.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?
A)12.60%
B)13.10%
C)13.63%
D)14.17%
E)14.74%

Question

Quizplus · Accepted Answer

The cost of equity from retained earnings is estimated as the yield on the firm's bonds plus a risk premium. The yield on the firm's bonds is 8.75%, and the risk premium is 3.85%. Therefore, the cost of equity from retained earnings is 8.75% + 3.85% = 12.60%.

AButcher Timber Company Hired Your Consulting Firm to Help Them