Consider the following information:
30-day treasury rate (Risk Free rate) 5.2%
Company XYZ Bond yield 12.2%
Beta 1.2 -
Risk Premium 4.5%
Credit Rating BBB -
Calculate Company XYZ's cost of retained earnings using the Bond-Yield-plus-Risk-Premium approach.
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A. B. C. D. E. F.Explanation
To estimate a firm's cost of retained earnings using the Bond-Yield-plus-Risk-Premium approach, simply take the company's bond yield and add the risk premium.
In this case the cost of retained earnings = 12.2% + 4.5% = 16.7%.