The CFO of Lenox Industries Hired You as a Consultant

question 22

Multiple Choice

The CFO of Lenox Industries hired you as a consultant to help estimate its cost of capital.You have obtained 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%
• E)2.58%

---

Definitions:

Flashbulb Memory

A highly detailed, exceptionally vivid 'snapshot' of the moment and circumstances in which a piece of surprising and consequential (or emotionally arousing) news was heard.

Retention Cue

A retention cue is a stimulus or reminder that aids in the recall of information from memory.

Vivid Memory

A particularly clear and detailed memory of an event or moment, often with emotional significance, that remains strong over time.

Ignoring Base Rates

Involves disregarding statistical information in favor of anecdotal evidence when making judgments.