Answer: 12.6%
Step-by-step explanation:
From the question, we are told that a consultant firm has been hired by Eco Brothers Inc. to help them estimate the cost of common equity and that the yield on the firm's bonds is 8.75%, while the 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.
The estimate of the firm's cost of common from reinvested earnings will be the addition of the risk free rate and the risk premium. This will be:
= 8.75% + 3.85%
= 12.6%