You Have Been Hired by the CFO of Lugones Industries

question 89

Multiple Choice

You have been hired by the CFO of Lugones Industries to help estimate its cost of common equity.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_L = 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:

Business Firm

An organization engaged in commercial, industrial, or professional activities, either for profit or not-for-profit.

Profit Maximization

The process or strategy of adjusting a firm's operations, sales, and costs to achieve the highest possible profit.

Social Responsibility

The duty of entities, both individuals and organizations, to act in the best interests of society at large.

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Actions or efforts by individuals or groups that have a beneficial impact on their surrounding environment or social context.