Question

Your consultant firm has been hired by Eco Brothers Inc. 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 reinvested earnings?a. 12.60%b. 13.10%c. 13.63%d. 14.17%e. 14.74%

Answer 1

a. 12.60%

Step-by-step explanation:

The information given above that can be useful is the Risk Free rate and risk premium to calculation of cost of retained earnings.

We know that the calculation of cost of retained earnings =Cost of retained earnings = Risk Free rate + risk premium

= 8.75% + 3.85%

= 12.6%

Therefore the correct answer is a. 12.60%