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:

Money Supply

The sum total of all assets in the form of money within an economy at a specific instance, including all forms of cash, coinage, and the funds kept in both savings and current accounts.

Purchasing Power Parity

A theory in economics that compares different countries' currencies through a "basket of goods" approach, aiming to determine the relative value of two currencies.

Exchange Rate

The value of one currency for the purpose of conversion to another, determining how much of currency A is needed to purchase a unit of currency B.

Price Levels

A measure reflecting the average cost of a basket of goods and services in an economy, influencing the cost of living and economic health.