Which Method Is Best to Compute a Firm's Cost of Equity

question 10

Multiple Choice

Which method is best to compute a firm's cost of equity?

• A) CAPM
• B) Bond yield plus risk premium
• C) Constant growth model
• D) All of these methods
• E) None of these methods; use the current market price per share.

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Definitions:

Payment

The transfer of money or goods in exchange for a product, service, or to fulfill a legal obligation.

Overhead Expenses

Represents the ongoing costs of operating a business that are not directly tied to the production of goods or services, such as rent, utilities, and administrative salaries.

Profit

The financial gain achieved when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes involved in sustaining the activity.

Selling Price

The amount of money for which something is sold or offered for sale to a buyer.