Consider the following information:
30-day treasury rate (Risk Free rate) 6.4%
Company XYZ Bond yield 11.2%
Beta 1.1 -
Risk Premium 3.5%
Credit Rating B-
Marginal Tax Rate 40% 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.C
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 = 11.2% + 3.5% = 14.7%.