Question

When estimating the cost of equity by use of the bond-yield-plus-risk-premium method, we can generally get a good idea of the interest rate on new long-term debt, but we cannot be sure that the risk premium we add is appropriate. This problem leaves us unsure of the true value of rs.
True
False

Answer 1

Answer: True

Explanation: Bond-yield-plus-risk-premium method is used if the entity has publicly listed debt, shapes the bond return. This is therefore effective interest on a organization's long-term debt.

Here equity risk premium approximation can be extremely imprecise,  also fluctuating disorderly, depending on which framework is used.