Assume that the risk-free interest rate is 6 percent and that a firm can issue bonds at an interest rate of 9 percent. Assume further that the difference between the average yield on stocks and the average yield on corporate bonds is 4 percent. What is the risk premium associated with the firm's cost of equity capital?

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Quizplus · Accepted Answer

The risk premium associated with the firm's cost of equity capital is the difference between the average yield on stocks and the risk-free rate. Given that the difference between the average yield on stocks and corporate bonds is 4 percent, and the corporate bond rate is 9 percent, the average yield on stocks is 13 percent. The risk premium is then 13% - 6% = 7%.

Assume That the Risk-Free Interest Rate Is 6 Percent and That