Which of the Following Statements Is Most Correct

question 19

Multiple Choice

Which of the following statements is most correct?

• A) Beta measures market risk, but if a firm's stockholders are not well diversified, beta may not accurately measure stand-alone risk.
• B) If the calculated beta underestimates the firm's true investment risk, then the CAPM method will overestimate rs.
• C) The discounted cash flow method of estimating the cost of equity can't be used unless the growth component, g, is constant during the analysis period.
• D) An advantage shared by both the DCF and CAPM methods of estimating the cost of equity capital, is that they yield precise estimates and require little or no judgement.
• E) All of the statements above are false.

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Definitions:

Variable Interest

Interest that can change over the lifetime of a loan, credit line, or other form of financing, usually linked to a fluctuating benchmark rate.

Loss Contingencies

Potential losses that may occur in the future and are recorded in financial statements if they are probable and can be reasonably estimated.

Accrue

The process of recording expenses and revenues that have been incurred or earned, respectively, but not yet received or paid, in order to reflect the true financial position of an entity.

Estimated Loss

An anticipated loss that a company might suffer due to various risks and uncertainties, and which is accounted for in advance.