Which of the Following Statements Is Correct

question 17

Multiple Choice

Which of the following statements is correct?

• A)Surveys indicate that the CAPM is the most widely used method for estimating the cost of equity. However, other methods are also used because CAPM estimates may be subject to error, and people like to use different methods as checks on one another. If all of the methods produce similar results, then decision makers can have more confidence in the estimated cost of equity.
• B)The DCF model is generally preferred by academics and financial executives over other models for estimating the cost of equity. This is because of the DCF model's logical appeal and also because accurate estimates for its key inputs, the dividend yield and the growth rate, are easy to obtain.
• C)The bond-yield-plus-risk-premium approach to estimating the cost of equity may not always be accurate, but it has the advantage that its two key inputs, the firm's own cost of debt and its risk premium, can be found by using standardized and objective procedures.
• D)Although some methods used to estimate the cost of equity are subject to severe limitations, the CAPM is a simple, straightforward, and reliable model that consistently produces accurate cost of equity estimates. In particular, academics and corporate finance people generally agree that its key inputs-beta, the risk-free rate, and the market risk premium-can be estimated with little error.

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Definitions:

Intellectualization

A defense mechanism where a person engages in excessive abstract thinking to avoid dealing with emotional issues.

Subtle Form

An indirect or not immediately obvious manner of manifestation or expression.

Identification

A psychological process in which an individual assimilates attributes, beliefs, or standards of another person or group, often serving as a role model.

Fight-or-flight Response

An automatic physiological reaction to perceived harmful events, attacks, or threats to survival, prompting either combat or retreat.