Which of the Following Is NOT Accurate Regarding Cost of Equity

question 229

Multiple Choice

Which of the following is NOT accurate regarding cost of equity capital estimates calculated using the SML approach?

• A) The SML applies only to firms with stable dividend growth rates.
• B) Like the dividend growth model, SML generally relies on using the past to predict the future.
• C) Unlike the dividend growth model, the SML estimate adjusts for risk.
• D) To implement this approach, the financial manager must estimate a market risk premium and a beta coefficient.
• E) The quality of the estimate using the SML approach is sensitive to the quality of the estimates for the input variables in the model.

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Definitions:

Schachter Two-factor Theory

A psychological theory suggesting that emotion comes from a combination of a state of arousal and a cognitive label that specifies the emotion.

Emotional States

Various psychological conditions that reflect the emotional quality of an individual's experiences and govern mood, feeling, and expressions.

Schachter

American psychologist Stanley Schachter, known for his work on emotion, particularly the two-factor theory of emotion which integrates cognitive and physiological elements.

Physiological Cues

Physical signs or signals from the body that indicate the state of one's health or feelings.