The CFO of Lenox Industries Hired You as a Consultant

question 35

Multiple Choice

The CFO of Lenox Industries hired you as a consultant to help estimate its cost of common equity. You have obtained the following data: (1) rd = yield on the firm's bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) rRF = 5.00%, RPM = 6.00%, and b = 1.25. (3) D1 = $1.20, P0 = $35.00, and g = 8.00% (constant) . You were asked to estimate the cost of common based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference?

• A) 1.13%
• B) 1.50%
• C) 1.88%
• D) 2.34%
• E) 2.58%

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Definitions:

MC

Marginal Cost, the change in total production cost that comes from making or producing one additional unit.

ATC

Average Total Cost, which is the total cost divided by the number of goods produced, representing the per-unit production cost.

AVC

Average Variable Cost; the total variable cost divided by the quantity of output produced, indicative of variable costs per unit of output.

Marginal Cost Curve

This curve illustrates the change in the total cost that arises when the quantity produced is incremented by one unit. It is the graphical representation of the marginal cost of production as the amount produced changes.