Consider the following information:
30-day treasury rate (Risk Free rate) 7.2%
Company XYZ Bond yield 10.2%
Beta 0.8 -
Risk Premium 4.0%
Credit Rating B-
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.F
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 = 10.2% + 4.0% = 14.2%.