Mihov Inc. hired you as a consultant to help estimate its cost of capital. You h

Question

Mihov Inc. hired you as a consultant to help estimate its cost of capital. You have been provided with the following data. (1) rd = yield on the firm's bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) rRF = 5.00%, RPM = 6.00%, and b = 1.25. (3) D1 = $1.20; P0 = $35.00 and g = 8.00% (constant). You were asked to estimate the cost of equity based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference?
a. 1.13%
b. 1.50%
c. 1.88%
d. 2.34%
e. 2.58%

Explanation / Answer

1) 7.00% +4.00% = 11.0% 2) 5.00% +1.25 *6.00%= 12.5% 3) 35= 1.20/(r-.08)= 11.43% b) 1.50%

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