Mihov IncHired You as a Consultant to Help Estimate Its Cost

question 86

Multiple Choice

Mihov Inc.hired you as a consultant to help estimate its cost of capital.You have been provided with the following data.(1) : r_d = yield on the firm's bonds = 7.00%,and the risk premium over its own debt cost = 4.00%.(2) r_RF = 5.00%,RP_M = 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 equity 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%

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Definitions:

Long-run Average Cost

The per unit cost of production when all inputs, including those typically fixed, can be adjusted.

Short-run Marginal Cost

The cost incurred by producing one additional unit of a product or service in the short term, where some factors of production are fixed.

Envelope

In economics, often describes a theoretical outer limit or boundary, such as the envelope curve which envelopes all the possible positions of equilibrium.

Short-run Expansion Path

The route a firm takes to increase output by optimizing the combination of inputs used, given at least one fixed input, over a short period.