Which of the Following Statements Is CORRECT

question 14

Multiple Choice

Which of the following statements is CORRECT?

• A) The dividend growth model is generally preferred by academics and financial executives over other models for estimating the cost of equity.This is because of the dividend growth model's logical appeal and also because accurate estimates for its key inputs, the dividend yield and the growth rate, are easy to obtain.
• B) The bond-yield-plus-risk-premium approach to estimating the cost of equity may not always be accurate, but it has the advantage that its two key inputs, the firm's own cost of debt and its risk premium, can be found by using standardized and objective procedures.
• C) Surveys indicate that the CAPM is the most widely used method for estimating the cost of equity.However, other methods are also used because CAPM estimates may be subject to error, and people like to use different methods as checks on one another.If all of the methods produce similar results, this increases the decision maker's confidence in the estimated cost of equity.
• D) The dividend growth model model is preferred by academics and finance practitioners over other cost of capital models because it correctly recognizes that the expected return on a stock consists of a dividend yield plus an expected capital gains yield.
• E) Although some methods used to estimate the cost of equity are subject to severe limitations, the CAPM is a simple, straightforward, and reliable model that consistently produces accurate cost of equity estimates.In particular, academics and corporate finance people generally agree that its key inputs⎯beta, the risk-free rate, and the market risk premium⎯can be estimated with little error.

Recognize the conditions under which to reject or fail to reject the null hypothesis in the context of chi-squared tests.

Understand the impact of sample size and expected frequency on the test's validity.

Apply chi-squared tests to real-world scenarios across different contexts.

Recognize the shape and properties of the chi-squared distribution.

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Definitions:

Strong Axiom

Often refers to the strong axiom of revealed preference, which is a more stringent condition than the weak axiom, ensuring choices are consistent across different sets of available options.

Revealed Preferences

A theory that determines preferences by observing consumer choices and behaviors, rather than through direct inquiry about preferences.

Bundle

A collection of goods or services that are sold together as a single package deal.

Weak Axiom

A principle in consumer theory stating that if a consumer prefers bundle A over bundle B when prices are constant, then the consumer will not choose B over A if the price of A decreases and B's price remains unchanged.