A. Butcher Timber Company hired your consulting firm to help them estimate the cost of equity. The yield on the firm's bonds is 6.75%, and your firm's economists believe that the cost of equity can be estimated using a risk premium of 3.85% over a firm's own cost of debt. What is an estimate of the firm's cost of equity from retained earnings?

Based on the information given the estimate of the firm's cost of equity from retained earnings is 10.60%.

Using this formula

Cost of equity=YTM+RP

Where:

YTM=Yield on the firm's bonds=6.75%

RP= risk premium=3.85%

Let plug in the formula

Cost of equity=6.75%+3.85%

Cost of equity=10.60%

Inconclusion  the estimate of the firm's cost of equity from retained earnings is 10.60%.

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10.6%

Explanation:

We have the formula to calculate the cost of equity as following:

Cost of equity = Risk free rate of return + Premium expected for risk

The Risk free rate of return is given as the yield on the firm's bonds - which is equal to 6.75%.

The premium expected for risk is also given as 3.85%.

So that the cost of equity from retained earnings of Butcher Timber Company is:

Cost of equity = Risk free rate of return + Premium expected for risk

= 6.75% + 3.85% = 10.6%

Conclusion: cost of equity from retained earnings of the company is 10.6%

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answer; 33,000;