The cost of equity using the bond yield plus risk premium approach

The Hoover Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a companys cost of internal equity. Hoovers bonds yield 10.28%, and the firms analysts estimate that the firms risk premium on its stock over its bonds is 5.89. Based on the bond-yield-plus-risk-premium approach, Hoovers cost of internal equity is:

20.21%

15.36%

19.40%

16.17%