Which of the Following Statements Is CORRECT

question 48

Multiple Choice

Which of the following statements is CORRECT?

• A)If the calculated beta underestimates the firm's true investment risk⎯i.e., if the forward-looking beta that investors think exists exceeds the historical beta⎯then the CAPM method based on the historical beta will produce an estimate of r_s and thus WACC that is too high.
• B)Beta measures market risk, which is, theoretically, the most relevant risk measure for a publicly-owned firm that seeks to maximize its intrinsic value. This is true even if not all of the firm's stockholders are well diversified.
• C)An advantage shared by both the DCF and CAPM methods when they are used to estimate the cost of equity is that they are both "objective" as opposed to "subjective," hence little or no judgment is required.
• D)The specific risk premium used in the CAPM is the same as the risk premium used in the bond-yield-plus-risk-premium approach.
• E)The discounted cash flow method of estimating the cost of equity cannot be used unless the growth rate, g, is expected to be constant forever.

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Definitions:

Capital Flight

The rapid movement of large sums of money or capital out of a country, typically to avoid economic instability or unfavorable conditions.

Corruption

The abuse of entrusted power for personal gain, often undermining democracy, ethical values, and justice.

Labor Productivity

A measure of the economic output generated per unit of labor input, such as per hour worked.

Developing Nations

Countries with a lower standard of living, underdeveloped industrial base, and low Human Development Index relative to other countries.