Which of the Following Is a Major Assumption That Is

question 3

Multiple Choice

Which of the following is a major assumption that is embedded in the capital asset pricing model (CAPM) , which is often used to estimate the cost of retained earnings, r_s?

• A)All investors are well diversified.
• B)The firm's dividends and earnings grow at a constant rate far into the future.
• C)The firm's cost of equity and its cost of debt are always equal.
• D)The firm's cost of retained earnings must be less than its cost of preferred stock for the CAPM to provide a reasonable estimate for r_s.
• E)Investors primarily purchase stocks with beta coefficients equal to zero.

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Definitions:

Depositary Banks

Financial institutions that hold and manage securities for their clients, offering services such as safekeeping, collection of dividends, and exercise of rights.

Drawee Bank

A bank upon which a check or draft is drawn and is responsible for paying the amount to the individual or entity presenting it for payment.

Agent

A person authorized to act on behalf of another, known as the principal, in business transactions or other matters.

Stop Payment Order

A request made to a financial institution to cancel or halt the processing of a check or payment transaction.