Which of the Following Methods of Estimating the Cost of Common

question 57

Multiple Choice

Which of the following methods of estimating the cost of common equity for a firm treats risk explicitly?

• A) DCF method.
• B) CAPM method.
• C) Composite method.
• D) Bond-yield-plus-risk-premium method.
• E) Answers b and d are correct.

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Definitions:

Option

A financial derivative that represents a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified strike price on or before a specified date.

Employee Stock Options

A right, purchased from one party by another, granting the purchaser the option, but not the requirement, to either buy (call) or sell (put) a share at a pre-decided price during a specific timeframe or on a certain date.

Align Goals

The process of adjusting strategies or actions to ensure that various objectives or aims are in harmony or agreement.