Question

The Jackson Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company’s cost of internal equity. Jackson’s bonds yield 10.28%, and the firm’s analysts estimate that the firm’s risk premium on its stock over its bonds is 4.95%. Based on the bond-yield-plus-risk-premium approach, Jackson’s cost of internal equity is:

Answer 1

15.23%

Step-by-step explanation:

The computation of the cost of internal equity is shown below:

= Bonds yield + firm’s risk premium on its stock over its bonds

= 10.28% + 4.95%

= 15.23%

It is a combination of the bond yield and the risk premium which is over its bond.

We take these two items so that the cost of internal equity could be correctly computed