Which of the Following Statements Is CORRECT

question 30

Multiple Choice

Which of the following statements is CORRECT?

• A) The discounted cash flow method of estimating the cost of equity cannot be used unless the growth rate,g,is expected to be constant forever.
• B) If the calculated beta underestimates the firm's true investment risk-i.e. ,if the forward-looking beta that investors think exists exceeds the historical beta-then the CAPM method based on the historical beta will produce an estimate of r_s and thus WACC that is too high.
• C) Beta measures market risk,which is,theoretically,the most relevant risk measure for a publicly-owned firm that seeks to maximize its intrinsic value.This is true even if not all of the firm's stockholders are well diversified.
• D) An advantage shared by both the DCF and CAPM methods when they are used to estimate the cost of equity is that they are both "objective" as opposed to "subjective," hence little or no judgment is required.
• E) The specific risk premium used in the CAPM is the same as the risk premium used in the bond-yield-plus-risk-premium approach.

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Definitions:

Production Function

Describes the relationship between inputs used in production and the resulting output.

Positive

Characterized by or denoting an occurrence or condition that is affirmatively present or beneficial, often used in the context of positive effects or outcomes.

Lady of Auxerre

A small, ancient Greek sculpture representing a goddess or maiden, notable for its archaic style and originating from Crete.

Kore

Greek, “young woman.” An Archaic Greek statue of a young woman.