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Question:

Harlan most likely arrived at this estimate by using the:

A bond yield plus risk premium approach.
explanation

Using the CAPM approach, the estimated cost of common equity = 3% + 0.89(12% - 3%) = 11%. Using the dividend discount model approach, the growth rate = (0.3)(0.2) = 6% and the estimated cost of common equity = $3 / $50 + 6% = 12%. To get a cost of common equity of 14%, Harlan most likely added a risk premium to Cyrene’s bond yield.

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