Using the build-up method and assuming that no adjustment for industry risk is r

Question

Using the build-up method and assuming that no adjustment for industry risk is re­quired, calculate an equity discount rate for a small company, given the following information:
·         Equity risk premium = 5.0 percent
·         Mid-cap equity risk premium = 3.5 percent
·         Small stock risk premium = 4.2 percent
·         Income return on long-term bonds = 5.1 percent
·         Total return on intermediate-term bonds = 5.3 percent
·         Company-specific risk premium = 3.0 percent
·         20-year Treasury bond yield as of the valuation date = 4.5 percent

Select one:

a. 16.7

b. 20.2

c. 25.3

d. 30.6

Explanation / Answer

Equity discount rate=20 year treasury bond yield+small stock risk-premium+company specific risk premium

=4.5+4.2+3

=11.7

Unfortunately there seems to be an error because none of the above given options are correct.

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