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When Estimating the Cost of Equity by Use of the Bond-Yield-Plus-Risk-Premium

question 77

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When estimating the cost of equity by use of the bond-yield-plus-risk-premium method, we can generally get a good idea of the interest rate on new long-term debt, but we cannot be sure that the risk premium we add is appropriate. This problem leaves us unsure of the true value of rs.

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Definitions:

Operating Policies

Rules and guidelines that govern the activities and decisions of an organization.

Equity Method

An accounting technique used to record investments in other companies when the investor has significant influence but does not have full control.

Cash Surrender Value

The amount an insurance policyholder is entitled to receive if they decide to terminate the policy before it matures or an insured event occurs.

Annual Premiums

Annual premiums are the amount paid yearly for insurance coverage or other similar policies.

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