47、Sorbonne Systems Incorporated wants to determine the cost of equity that can be used in the calculation of the weighted average cost of capital. The CFO has gathered the following information:

Rate of return on 3-month Treasury bills 3.0%

Rate of return on 10-year Treasury bonds      3.5%

Market equity risk premium      6.0%

Sorbonne's estimated beta        1.6

Sorbonne's before-tax cost of debt 8.0%

Risk premium of equity over debt     4.0%

Using the capital asset pricing model (CAPM) approach and the bond yield plus risk premium approach, respectively, the cost of equity for Sorbonne is closest to:

     CAPM   Bond yield plus risk premium

A. 12.6%    12%

B.   12.6%    14%

C. 13.1%    12%

D. 13.1%    14%

A. Answer A

B. Answer B

C. Answer C

D. Answer D

47、Correct answer is C

"Cost of Capital," Yves Courtois, Gene C. Lai, and Pamela P. Peterson

2008 Modular Level I, Vol. 4, pp. 50-55

Study Session 11-45-h

calculate and interpret the cost of equity capital using the capital asset pricing model approach, the dividend discount model approach, and the bond-yield-plus-risk-premium approach

The cost of equity using the CAPM = 3.5 + 1.6(6) = 13.1% and with the bond-yield-plus-risk-premium approach = 8 + 4 = 12%

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