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:

Face Value

The nominal or dollar value printed on a financial instrument, such as a bond or stock certificate.

Bond Certificate

A physical document representing the investor's right to receive the principal and interest from a bond issuer.

Semiannual Interest

Interest that is calculated and paid twice a year, often on a bond or loan.

Bond Premium

The amount by which the market price of a bond exceeds its face value, usually occurring when the bond's interest rate is higher than the current market rate.