Which of the Following Is an Assumption in Applying the Capital

question 8

Multiple Choice

Which of the following is an assumption in applying the capital asset pricing model (CAPM) to estimate the cost of equity capital?

• A) The investors are well diversified.
• B) The firm's dividends and earnings grow at a constant rate far into the future.
• C) The cost of equity and the cost of debt of a firm are always equal.
• D) The cost of retained earnings is lower than the cost of preferred stock due to the tax savings on earnings retained.
• E) The investors always prefer to receive lower return on retained earnings than regular dividend payments.

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Definitions:

Vasospasm

A condition characterized by the sudden constriction of blood vessels, reducing blood flow, often associated with conditions such as Raynaud's phenomenon or after a subarachnoid hemorrhage.

Hemolysis

The breaking down of red blood cells, leading to the release of hemoglobin into the surrounding fluid.

Elevated Liver Enzymes

Higher than normal levels of enzymes in the liver, indicating liver damage or inflammation.

Cervical Incompetence

A medical condition where the cervix weakens and dilates prematurely, leading to a risk of preterm birth or miscarriage.