Which of the Following Is NOT Accurate Regarding Cost of Equity

question 139

Multiple Choice

Which of the following is NOT accurate regarding cost of equity capital estimates calculated using the SML approach?

• A) The SML applies only to firms with stable dividend growth rates.
• B) Like the dividend growth model, SML generally relies on using the past to predict the future.
• C) Unlike the dividend growth model, the SML estimate adjusts for risk.
• D) To implement this approach, the financial manager must estimate a market risk premium and a beta coefficient.
• E) The quality of the estimate using the SML approach is sensitive to the quality of the estimates for the input variables in the model.

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Definitions:

Monthly Net Operating Income

The profit a company generates from its normal business operations, excluding unusual or infrequent items, on a monthly basis.

Margin of Safety

Margin of Safety is the difference between actual or expected sales and the break-even point, expressed in terms of units, dollars, or percentage, indicating how much sales can fall before a business incurs a loss.

Contribution Margin Ratio

A financial metric that measures how much of a company's revenue is available to cover its variable costs and contribute to its fixed costs and profits.

Fixed Costs

Expenses that do not change with the level of goods or services produced by the business, such as rent, salaries, and insurance premiums.