Corporate Finance Quiz Question 12

varsha.rajpurohit
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Joined: Thu Sep 06, 2012 10:08 am

Corporate Finance Quiz Question 12

Postby varsha.rajpurohit » Thu Sep 06, 2012 10:42 am

The market yield on the company’s long term debt is 8%. The risk premium for the equity is estimated to be 3 %. Can we estimate the cost of equity from the data given above?

Choose one answer.
a. No
b. Yes and the value would be 11%
c. Yes and the value would be 5%

Given Solution: The correct answer is Yes and the value would be 11%.

Since Beta is not given so shouldn't the answer have been choice a as we do not have sufficient data to answer the question.

Please clarify.Thanks

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shreyas
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Joined: Thu Jul 19, 2012 6:49 pm

Re: Corporate Finance Quiz Question 12

Postby shreyas » Mon Sep 10, 2012 3:06 pm

There are three approaches to calculate the cost of equity
CAPM, dividend discount model and Bond yield plus risk premium approach,the approach used here is the bond yield plus risk premium approach and not CAPM which requires beta.

varsha.rajpurohit
Posts: 9
Joined: Thu Sep 06, 2012 10:08 am

Re: Corporate Finance Quiz Question 12

Postby varsha.rajpurohit » Mon Sep 10, 2012 4:29 pm

Thanks again Shreyas


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