Bond Yield Plus Risk Premium question

CFA Level II Equities
#1

Hi All - just have a very simple question about the bond yield plus risk premium approach, which I’m finding a bit confusing, even though it appears very simple.

In the CFAI Equity book, page 84-85, it says that the bond yield plus risk premium approach = YTM on company’s long-term debt + a risk premium. It then gives the IBM example (YTM = 4.43%, RP = 2.75%, which gives 7.18%). Simple!

However, on page 241, the answer to question 5B is given as 5.6% + 2.5%, but the yield on the debt is 6.9%.

How/why did they adjust the YTM?

Thanks John

#2

It looks like an error to me. Have you checked the errata?

#3

Aha - checked the errata. Thanks - it’s in there.

#4

Whew!