In Comparing the Constant Growth Model and the Capital Asset

question 13

Multiple Choice

In comparing the constant growth model and the capital asset pricing model (CAPM) to calculatethe cost of common stock equity,

• A) the CAPM directly considers risk as reflected in the beta, while the constant growth model uses dividend expectations as a reflection of risk.
• B) the CAPM directly considers risk as reflected in the beta, while the constant growth model uses the market price as a reflection of the expected risk-return preference of investors.
• C) the CAPM indirectly considers risk as reflected in the market return, while the constant growth model uses dividend expectations as a reflection of risk.
• D) the constant growth model ignores risk, while the CAPM directly considers risk as reflected in the beta.

---

Definitions:

Formal Contract

A legally binding agreement that requires a specific form, such as being in writing, to be valid.

Bond

A fixed income investment in which an investor loans money to an entity that borrows the funds for a defined period.

Restatement (Second)

A collection of model legal rules and principles meant to clarify the common law in the United States, not binding but influential.

Law of Contracts

A set of laws that govern the formation, execution, and enforcement of agreements between parties.