Which of the Following Statements Is Correct

question 55

Multiple Choice

Which of the following statements is correct?

• A) Beta measures market risk,but if a firm's stockholders are not well diversified,beta may not accurately measure the firm's total risk.
• B) If the calculated beta underestimates the firm's true investment risk,then the CAPM method will overestimate r_s.
• C) The discounted cash flow method of estimating the cost of equity can't be used unless the growth component,g,is constant during the analysis period.
• D) An advantage shared by both the DCF and CAPM methods of estimating the cost of equity capital,is that they yield precise estimates and require little or no judgment.
• E) None of the above is a correct statement.

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Definitions:

Arbitrage

The practice of taking advantage of price differences between markets to make a profit.

Vertical Contracts

Agreements between firms at different levels in the supply chain (e.g., manufacturer and retailer) to govern the terms of sale or purchase.

Costly Activities

Actions or processes that require a significant amount of resources, such as time, money, or effort.

Retailers

Businesses or individuals that sell goods directly to consumers.