To Estimate the Cost of Equity Capital for a Firm

question 12

Multiple Choice

To estimate the cost of equity capital for a firm using the CAPM,it is necessary to have:

• A) company financial leverage, beta, and the market risk premium.
• B) company financial leverage, beta, and the risk-free rate.
• C) beta, company financial leverage, and the industry beta.
• D) beta, company financial leverage, and the market risk premium.
• E) beta, the risk-free rate, and the market risk premium.

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Definitions:

Debt to Equity Ratio

A financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company’s assets.

Total Liabilities

This term represents the aggregate of all debts and financial obligations owed by an entity to outside parties at any given point in time.

Stockholders' Equity

The residual interest in the assets of a corporation after deducting liabilities, representing the ownership interest of shareholders.

Profitability Ratios

Financial metrics used to assess a business's ability to generate profit relative to its revenue, assets, or equity.