The Capital Asset Pricing Model (CAPM)is One of Three Approaches

question 54

True/False

The capital Asset Pricing Model (CAPM)is one of three approaches used to calculate a firm's cost of equity.

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Definitions:

M&M Proposition II

A theory proposing that the value of a firm is unaffected by its capital structure, assuming no taxes and that investment returns are required to increase with leverage.

Cost of Equity

The rate of return that a company is expected to pay to its shareholders to compensate them for the risk of investing in the equity of the company.

Leverage

The use of various financial instruments or borrowed capital, like debt, to increase the potential return of an investment.

Debt-Equity Ratio

The ratio of a firm's total liabilities to its shareholders' equity, used to assess financial leverage.