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:

Warranty

A guarantee, typically from a manufacturer or seller, promising to repair or replace defective goods within a specified time period.

Lease Liability

A financial obligation representing the present value of future lease payments that a lessee is required to make under a lease agreement.

Discount Rate

The interest rate used in discounted cash flow (DCF) analysis to present value future cash flows, or in the context of bond investments, it is the interest rate used by investors to compare different bond issues.

Capital Lease

A lease considered as a purchase of an asset, where the lessee records the leased asset as if it were owned.