When Estimating the Cost of Equity by Use of the CAPM

question 41

True/False

When estimating the cost of equity by use of the CAPM, three potential problems are (1) whether to use long-term or short-term rates for r_RF, (2) whether or not the historical beta is the beta that investors use when evaluating the stock, and (3) how to measure the market risk premium, RP_M.These problems leave us unsure of the true value of r_s.

---

Definitions:

Motivation

The psychological processes that arouse and direct goal-directed behavior.

Open Innovation

An approach to innovation that stresses the importance of collaboration and sharing ideas and technologies between organizations rather than relying solely on internal resources and capabilities.

Organization

An entity comprising multiple people structured in a specific way to achieve a series of goals or objectives.

Knowing-Doing Gap

The disconnect between knowing what needs to be done and actually implementing or doing it, often observed in organizational settings.