You Have Been Hired by the CFO of Lugones Industries

question 88

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) 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) D? = $1.20, P? = $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:

Depreciation Expense

The calculated apportionment of the price of a tangible asset over the duration it is useful.

Components

The individual parts or elements that make up a larger product, system, or machine.

Depreciated Separately

An accounting method in which assets are depreciated individually, based on their own useful life and depreciation rate, rather than being grouped together with other assets.

IFRS

International Financial Reporting Standards, a set of accounting standards developed by the International Accounting Standards Board (IASB) that serve as a global framework for financial statements.