In Calculating the Cost of Common Stock Equity, the Model

question 45

Multiple Choice

In calculating the cost of common stock equity, the model having the stronger theoretical foundation is

• A) the constant growth model.
• B) the capital asset pricing model.
• C) the variable growth model.
• D) the Gordon model.

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Definitions:

Target Profit

The desired level of profit a company aims to achieve, often used in pricing and business strategy planning.

Fixed Expense

Costs that do not vary with the level of production or sales, such as rent, salaries, and insurance premiums.

Margin of Safety

The difference between actual sales and the break-even point, indicating the risk level of not covering fixed costs.

Break-even Sales

The amount of revenue required to cover all fixed and variable costs, resulting in neither profit nor loss.