Which of the Following Methods of Estimating the Cost of Common

question 80

Multiple Choice

Which of the following methods of estimating the cost of common equity for a firm treats risk explicitly?

• A) DCF method.
• B) CAPM method.
• C) Composite method.
• D) Bond-yield-plus-risk-premium method.
• E) Answers b and d are both correct.

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Definitions:

Net Income (Loss)

The total profit or loss a company generates in a specific period after all expenses, taxes, and costs have been deducted from total revenue.

Fixed Expenses

Costs that do not change with the level of production or sales activities within a certain range or period.

Variable Expenses

Costs that change in proportion to the level of activity within a business.

Contribution Margin

The amount by which the sales revenue of a product exceeds its variable costs, indicating how much contributes towards covering fixed costs and generating profit.