
Explanation:
The bond yield plus risk premium approach can be used because:
Required ROE = Cost of debt + Risk premium = 6% + 7% = 13%
While DDM could potentially be used with the dividend and growth rate, we don't have the current stock price needed for DDM calculation. CAPM could be used with risk-free rate and beta, but we're missing the market risk premium. The bond yield plus risk premium approach can be directly calculated with the given data.
$5Based only on the data in the table, the required ROE can be calculated using which of the following?
A
DDM
B
CAPM
C
Bond yield plus risk premium approach
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