Question #12 - Reading 17 Cost of Capital

Reading: Reading 17 Cost of Capital - Advanced Topics

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Shared Context

- Helsevesen's cost of common equity using the Fama-French five-factor model is closest to: A) 10.3%. B) 12.3%. C) 8.3%.

Question

Helsevesen's cost of common equity using the bond yield plus risk premium (BYPRP) model is closest to:

Answer Choices:

A. 8.3%

B. 10.3%

C. 12.3%

Explanation

Helsevesen's estimated cost of common equity using the BYPRP model can be calculated by adding the estimated cost of debt of 5.8% Johansen derived from matrix pricing to Johansen's estimated premium of 6.2% earned by equity investors relative to long-term corporate bond yields: re = rd + RP re = 0.049 + 0.054 = 0.103, or 10.3%.

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