Donoho Corp. issued 20-year, $1,000 par bonds eight years ago with a 10% coupon paying semiannually that are now selling for $1,152.47. Estimate the cost of retained earnings assuming investors generally demand a 5% risk premium on equity over the cost of debt.

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The cost of debt can be calculated using the current yield on the bonds. Since the bonds are selling for $1,152.47 and have a 10% coupon rate on a $1,000 par value, they pay $100 annually in interest. The yield to maturity (YTM) can be approximated by the annual interest payment divided by the current bond price, which gives us the current cost of debt. However, for a more accurate calculation, we would use the bond price formula, but given the information, we can estimate the cost of debt to be lower than the coupon rate due to the bond's price being above par. The exact YTM calculation is complex and requires financial calculators or software, but it's clear the bond's yield (cost of debt for the company) is lower than 10% due to the premium price. Given investors demand a 5% risk premium on equity over the cost of debt, and assuming the cost of debt is around or below the coupon rate due to the bond selling at a premium, the cost of equity (or retained earnings) would be significantly higher than the bond's yield. Without the exact YTM, we approximate: if the bond's YTM is around 8% (a guess based on the bond selling at a premium), adding the 5% risk premium gives us approximately 13% for the cost of retained earnings. This is a simplification, as calculating YTM precisely would provide a more accurate cost of debt and thus a more precise cost of retained earnings.