All of the Following Methods Can Be Used to Estimate

question 61

Multiple Choice

All of the following methods can be used to estimate the cost of equity except:

• A)Like debt and preferred stock,cash flows from common equity are fixed.
• B)Firms have two sources of common equity,retained earnings and new stock issues,but only one single cost of common equity.
• C)From the shareholders' perspective,the opportunity cost of retained earnings is the return the shareholders could earn by investing the funds in long-term treasury securities.
• D)If the firm cannot invest its retained earnings to achieve a sufficient risk-adjusted return,shareholders would be better off receiving additional shares of stock.
• E)None of the above statements are correct.

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Definitions:

Stock's Beta

An indicator of how volatile a stock is compared to the general market, where a beta value above 1 signifies that the stock experiences more fluctuation than the market overall.

Standard Deviation

In finance, standard deviation measures the amount of variance or dispersion of a set of financial returns, indicating the investment's volatility.

Expansionary Fiscal Policy

An increase in government purchases, decrease in net taxes, or some combination of the two aimed at increasing aggregate demand enough to reduce unemployment and return the economy to its potential output; fiscal policy used to close a recessionary gap

Contractionary Fiscal Policy

A decrease in government purchases, increase in net taxes, or some combination of the two aimed at reducing aggregate demand enough to return the economy to potential output without worsening inflation; fiscal policy used to close an expansionary gap.