[Verse 1] When you need to find the cost of equity There's a method that works quite easily Take your company's bond yield as your base Then add a premium to find your place The risk that equity holders must bear Above the bondholders' return so fair [Chorus] Bond yield plus the risk premium That's the way to calculate them Equity costs more than debt you see Bond yield plus risk premium equals equity Remember this simple equation For your valuation station [Verse 2] Bondholders get paid before the shares So equity holders face greater cares The premium reflects this extra risk Usually three to five percent's the gist Look at market data for your guide Historical spreads help you decide [Chorus] Bond yield plus the risk premium That's the way to calculate them Equity costs more than debt you see Bond yield plus risk premium equals equity Remember this simple equation For your valuation station [Bridge] Start with bonds, they're safer ground Add the risk that can be found In the equity market's uncertainty That's your cost of equity [Verse 3] This approach works best when bonds are traded Market yields easily calculated If your company has debt outstanding This method's really quite outstanding Simple math with market insight Gets your cost of equity right [Chorus] Bond yield plus the risk premium That's the way to calculate them Equity costs more than debt you see Bond yield plus risk premium equals equity Remember this simple equation For your valuation station [Outro] When CAPM seems too complex to use This bond approach clears up the blues Bond yield plus risk premium Your equity cost solution
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