Question

Your consulting 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 Eco Brothers Inc. cost of common can be determined through the following mentioned formula:

cost of common=Cost of debt+risk premium over cost of debt

In the given question

Cost of debt=8.75%

Risk premium over cost of debt=3.85%

Cost of common=8.75%+3.85%

=12.6%

So based on the above calculations, the answer is a. 12.60%