The kennedy company is closely held and, therefore, cannot generate reliable inputs with which to use the capm method for estimating a company's cost of internal equity. kennedy's bonds yield 11.52%, and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is 4.95%. based on the bond-yield-plus-risk-premium approach, kennedy's cost of internal equity is:

a. 19.76%

b. 16.47%

c. 18.12%

d. 15.65%

Option (B) is correct.

Explanation:

Here, we are using the CAPM method for estimating a company's cost of internal equity.

Given that,

Kennedy's bonds yield = 11.52 percent

Firm's risk premium on its stock over its bonds = 4.95%

Based on the bond-yield-plus-risk-premium approach, Kennedy's cost of internal equity is as follows:

Kennedy's cost of internal equity:

= Kennedy's bonds yield + Firm's risk premium on its stock over its bonds

= 11.52% + 4.95%

= 16.47%

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