Butcher timber company hired your consulting firm to them estimate the cost of equity. the yield on the firm's bonds is 10.50%, and your firm's economists believe that the cost of equity can be estimated using a risk premium of 3.85% over a firm's own cost of debt. what is an estimate of the firm's cost of equity from retained earnings?

Cost of Equity will be= 14.35%

Explanation:

Cost of equity can be calculated as Risk free return+[beta*Risk Premium]

IN given case Risk free return will be yield on bond=10.05%

Risk Premium given=3.85%

But beta of company is not given, and market beta also not given, hence we can not calculate beta.

we can assume beta of company is 1, then-

Cost of Equity will be= 10.50%+3.85%= 14.35%

Note- Retained earning also not given so that we calculate based of retain earning.

there was no passage listed but using the process of elimination i'd say it was d. the high economy would do the opposite. i don't see how low prices would affect it. high unemployment is possible but i feel d is the better answer.

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