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A. Butcher Timber Company hired your consulting firm to help them estimate the cost of equity. The yield on the firm's bonds is 6.75%, 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?

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cecepham

Answer:

10.6%

Explanation:

We have the formula to calculate the cost of equity as following:

Cost of equity = Risk free rate of return + Premium expected for risk

The Risk free rate of return is given as the yield on the firm's bonds - which is equal to 6.75%.

The premium expected for risk is also given as 3.85%.

So that the cost of equity from retained earnings of Butcher Timber Company is:

Cost of equity = Risk free rate of return + Premium expected for risk

= 6.75% + 3.85% = 10.6%

Conclusion: cost of equity from retained earnings of the company is 10.6%

abiolataiwo2015

Based on the information given the estimate of the firm's cost of equity from retained earnings is 10.60%.

Using this formula

Cost of equity=YTM+RP

Where:

YTM=Yield on the firm's bonds=6.75%

RP= risk premium=3.85%

Let plug in the formula

Cost of equity=6.75%+3.85%

Cost of equity=10.60%

Inconclusion  the estimate of the firm's cost of equity from retained earnings is 10.60%.

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https://brainly.com/question/13992717

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