The CFO of Lenox Industries hired you as a consultant to help estimate its cost of capital. You have obtained the following data: (1) ra = yield on the firm's bonds = 9.00% and the risk premium o over its own debt cost = 4.00%. (2) TRF = 5.00 %, RPM = 6.20%, and b= 1.55. (3) D₁ = $1.50, Po= $36.00, and g = 8.00% (constant). You were asked to estimate the cost of equity based on O the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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3.
The CFO of Lenox Industries hired you as a consultant to help
estimate its cost of capital. You have obtained the following data:
(1) rayield on the firm's bonds = 9.00% and the risk premium
oover its own debt cost = 4.00%. (2) TRF = 5.00% , RPM = 6.20%,
and b= 1.55. (3) D₁ = $1.50, Po= $36.00, and g = 8.00%
(constant). You were asked to estimate the cost of equity based on
O the three most commonly used methods and then to indicate the
difference between the highest and lowest of these estimates. What
is that difference?
O
Oa. 4.86%
Ob. 0.83%
O c. 1.45%
O d. 1.61%
O e. 2.44%
Transcribed Image Text:3. The CFO of Lenox Industries hired you as a consultant to help estimate its cost of capital. You have obtained the following data: (1) rayield on the firm's bonds = 9.00% and the risk premium oover its own debt cost = 4.00%. (2) TRF = 5.00% , RPM = 6.20%, and b= 1.55. (3) D₁ = $1.50, Po= $36.00, and g = 8.00% (constant). You were asked to estimate the cost of equity based on O the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference? O Oa. 4.86% Ob. 0.83% O c. 1.45% O d. 1.61% O e. 2.44%
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