Which of the Following Statements Is Most Correct

question 20

Multiple Choice

Which of the following statements is most correct?

• A) The CAPM approach to estimating a firm's cost of common stock never gives a better estimate than the DCF approach.
• B) The CAPM approach is typically used to estimate a firm's cost of preferred stock.
• C) The risk premium used in the bond-yield-plus-risk-premium method is the same as the one used in the CAPM method.
• D) In practice (as opposed to in theory), the DCF method and the CAPM method usually produce exactly the same estimate for rs.
• E) The statements above are all false.

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Definitions:

Quarterly Dividend

A distribution of a portion of a company's earnings, declared by the board of directors, to shareholders on a quarterly basis.

Capital Gains Yield

The rise in the price of a security, expressed as a percentage, which results in a capital gain for the investor.

Common and Preferred Stock

Designations for equity investments, where common stockholders have voting rights and dividend variability, while preferred stockholders receive dividends at fixed rates and have priority over common stock in asset distribution.

Non-callable Debentures

Fixed-income securities that cannot be redeemed by the issuer before their specified maturity date.