Which of the Following Statements Is Correct

question 17

Multiple Choice

Which of the following statements is correct?

• A)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, then decision makers can have more confidence in the estimated cost of equity.
• B)The DCF model is generally preferred by academics and financial executives over other models for estimating the cost of equity. This is because of the DCF model's logical appeal and also because accurate estimates for its key inputs, the dividend yield and the growth rate, are easy to obtain.
• C)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.
• D)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.

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Definitions:

Arctic Tundra

A biome characterized by a cold, desert-like climate located at high latitudes above the Arctic Circle, with permafrost and minimal vegetation.

Coniferous Forest

A biome characterized by evergreen trees with needles and cones, often found in cooler northern latitudes.

Natural Grassland

Ecosystems dominated by grasses and other non-woody plants, often subject to periodic fires and grazing.

Annual Precipitation

The total amount of rain, snow, sleet, or hail that falls in a geographic area over a year.