Which of the Following Statements Is Correct About Using the Capital

question 14

Multiple Choice

Which of the following statements is correct about using the capital asset pricing model (CAPM) to determine a firm's component costs of capital?

• A)The capital asset pricing model (CAPM) gives a better estimate than the discounted cash flow (DCF) approach of a firm's cost of retained earnings.
• B)The capital asset pricing model (CAPM) approach is typically used to estimate the flotation costs associated with issuing new common equity.
• C)The beta coefficient used in the capital asset pricing model (CAPM) is equal to the growth rate used in the discounted cash flow (DCF) method.
• D)The capital asset pricing model (CAPM) and the discounted cash flow (DCF) approach provide the same estimate for the firm's cost of retained earnings, rs.
• E)The capital asset pricing model (CAPM) assumes investors are well diversified, whereas the discounted cash flow (DCF) approach assumes the firm grows at a constant growth rate.

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