Reading 33 Example 6 on page 239-241 - Gordon Growth vs Bond Yield Plus Risk Premium

CFA Level II Equities
#1

Hi guys - looking for a bit of help on bond yield plus risk premium calculation.

Example 6 in reading 33 ( page 239-241) had a question in which we were to compare Gordon Growth Value using required return on equity vs a bond yield plus risk premium approach. The question gave us the risk premium, however I’m unsure how to get the computed bond yield. No where in the problem did they mention anything about a bond yield, the only piece of information provided stated the pre-tax cost of debt.

“Kim estimates that MSEX’s pretax cost of debt is 6.9 percent based on Standard & Poor’s issuer rating for MSEX of A- and the current corporate yield curve”

Sorrt if I’m missing something completely obvious, but I can not figure out how they got the solution.

#2

The 6.9% pretax cost of debt is given; you didn’t need to calculate it.

#3

This example is actually included in the errata, that might cause the confusion: “In the fourth bullet point of Example 6 (p. 240 of print), MSEX’s pretax cost of debt is 5.6 percent (instead of 6.9 percent).”

#4

There you go.

#5

Thank you both!

#6

My pleasure.