Which of the Following Statements Is CORRECT

question 67

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.

---

Definitions:

Participation

The act of taking part or being actively involved in something, often referring to employees' involvement in decision-making processes within an organization.

HR Professionals

Are individuals who work within the human resources field, focusing on the management of employee-related processes including recruitment, training, and compliance with labor laws.

Credible Activist

A person who actively campaigns for change and is recognized for their sincerity, integrity, and influence.

Strategic Positioner

A role in which individuals or organizations identify and leverage competitive advantages in the market or industry to achieve long-term success.