Which of the Following Statements Is CORRECT

question 83

Multiple Choice

Which of the following statements is CORRECT?

• A) If the calculated beta underestimates the firm's true investment risk⎯i.e., if the forward-looking beta that investors think exists exceeds the historical beta⎯then the CAPM method based on the historical beta will produce an estimate of r_s and thus WACC that is too high.
• B) Beta measures market risk, which is, theoretically, the most relevant risk measure for a publicly-owned firm that seeks to maximize its intrinsic value.This is true even if not all of the firm's stockholders are well diversified.
• C) An advantage shared by both the dividend growth model and CAPM methods when they are used to estimate the cost of equity is that they are both "objective" as opposed to "subjective," hence little or no judgment is required.
• D) The specific risk premium used in the CAPM is the same as the risk premium used in the bond-yield-plus-risk-premium approach.
• E) The discounted cash flow method of estimating the cost of equity cannot be used unless the growth rate, g, is expected to be constant forever.

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Definitions:

Within-Subjects Research Design

A study design where the same subjects are exposed to all conditions or treatments, allowing for direct comparison within the same group of participants.

Homogeneity of Variance

An assumption for certain statistical tests which posits that the variance among different groups or samples are equal.

Standard Deviations

Standard deviation is a measure of the dispersion or variability within a set of data, indicating how much individual data points deviate from the mean of the data set.

Null Hypothesis

A statement that there is no effect or no difference and that any observed effect is due to sampling or experimental error.