A. Butcher Timber Company hired your consulting firm to help them estimate the cost of common equity. The yield on the firm's bonds is 8.75%, and your firm's economists believe that the cost of common 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 common from retained earnings?

Question

Quizplus · Accepted Answer

The cost of common equity from retained earnings is estimated by adding the yield on the firm's bonds to 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 common equity from retained earnings is 8.75% + 3.85% = 12.60%.

A Butcher Timber Company Hired Your Consulting Firm to Help