Which of the Following Statements Is CORRECT

question 21

Multiple Choice

Which of the following statements is CORRECT?

• A) 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.
• 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) 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.
• E) The DCF 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.

Explain the role of resource prices and costs of production in determining the slope of the short-run aggregate supply curve.

Analyze equilibrium conditions in the aggregate demand and aggregate supply model.

Understand the concept of market risk, including how beta measures the sensitivity of a stock's returns to market movements.

Comprehend the benefits of diversification in reducing investment risk.

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Definitions:

Operating Leverage Factor

A measure that assesses the degree to which a company can increase operating income by increasing revenue, highlighting the fixed versus variable costs structure.

Sales Revenue

The total amount of money generated from the sale of goods or services before any expenses are subtracted.

Profit Increase

The growth in profit from one period to another, often measured as a percentage increase, indicating the company's improved financial performance.

Cost Volume Profit Analysis

An accounting method used to determine the breakeven point of sales and to estimate the effect of changes in costs and volume on a company's profit.