Cost of Equity Capital

A firm is raising capital for a new project. Their oustanding bonds pay 14% interest annually. Investors currently pay $1124 for the 10-year bond. This firm plans to issue common stock. The additional risk permium on the firm's stock is 2.3%. Estimate the cost of equity capital?

• Take a minute and rewrite this information in your own words?
• What information is provided and what are you trying to find?
• Which intermediate steps are needed (do you need the yield to maturity on the bonds?)
• Which of the three cost of equity methods should be used based on the information provided

Solve for the cost of equity

		4.99%
		6.51%
		4.21%
		None of the other choices
		2.69%