In Applying the CAPM to Estimate the Cost of Equity

question 37

Multiple Choice

In applying the CAPM to estimate the cost of equity capital, which of the following elements is not subject to dispute or controversy?

• A) The expected rate of return on the market, rM.
• B) The stock's beta coefficient, bi.
• C) The risk-free rate, rRF.
• D) The market risk premium (RPM).
• E) All of the above are subject to dispute.

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Definitions:

Free Cash Flows

The amount of cash a company generates after accounting for capital expenditures needed to maintain or expand its asset base.

Capital Structure

The capital structure is the mix of a company's long-term debt, short-term debt, common equity, and preferred equity, representing how a firm finances its overall operations and growth through various sources of funds.

Free Cash Flow to Equity

The amount of cash that could be potentially distributed to shareholders after all expenses, reinvestments, and debt repayments have been taken care of.

Levered Beta

A measurement of the volatility of a stock, including the impact of the company's debt, relative to the market as a whole.