You have been hired by the CFO of Lugones Industries to help estimate its cost of common equity. You have obtained the following data: (1) rd = yield on the firm's bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) rRF = 5.00%, RPM = 6.00%, and b = 1.25. (3) D1 = $1.20, P0 = $35.00, and gL = 8.00% (constant). You were asked to estimate the cost of common based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference?
A) 1.13%
B) 1.50%
C) 1.88%
D) 2.34%
E) 2.58%

Question

Quizplus · Accepted Answer

$\begin{array}{lc}
\text { Bond yield } & 7.00 \% \mathrm{D}_{1}& \$1.20 \
\text { Risk premium } & 4.00 \% \mathrm{P}_{0}&\$ 35.00 \
\mathrm{r}_{\mathrm{s}} & 11.00 \% \mathrm{~g}&8.00 \% \
& \mathrm{r}_{\mathrm{S}} &11.43 \%\
\mathrm{RF} & 5.00 \% \
\mathrm{RP}_{\mathrm{M}} & 6.00 \% \mathrm{Max}&12.50 \% \
\mathrm{b} & 1.25 \mathrm{Min} &11.00 \%\
\mathrm{r}_{\mathrm{s}} & 12.50 \% \text { Difference } &1.50 \%\
\end{array}$

You Have Been Hired by the CFO of Lugones Industries