P.Lange Inc.hired your consulting firm to help the company estimate the cost of equity.The yield on Lange's bonds is 7.25%,and your firm's economists believe that the cost of equity can be estimated using a risk premium of 3.50% over a firm's own cost of debt.What is an estimate of Lange's cost of equity from retained earnings?

Question

Quizplus · Accepted Answer

The cost of equity can be estimated by adding the risk premium to the cost of debt. Given the yield on Lange's bonds is 7.25% and the risk premium is 3.50%, the cost of equity is 7.25% + 3.50% = 10.75%.

PLange Inc