Question

Butcher Timber Company hired your consulting firm to help them estimate the cost of equity. The yield on the firm's bonds is 8.75%, and your firm's economists believe that the cost of equity 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 equity from retained earnings?

Answer 1

12.60%

Step-by-step explanation:

Calculation for the estimate of the firm's cost of equity from retained earnings

Using this formula

Estimate Firm's cost of equity =Risk premium + Cost of debt

Let plug in the formula

Estimate Firm's cost of equity=3.85% + 8.75%

Estimate Firm's cost of equity= 12.60%

Therefore the estimate of the firm's cost of equity from retained earnings will be 12.60%