All of the Following Methods Can Be Used to Estimate

question 59

Multiple Choice

All of the following methods can be used to estimate the cost of equityare correct except:

• A)Unlike debt and preferred stock, cash flows from common equity are not fixed or known beforehand and their risk is harder to evaluate.
• B)Firms have two sources of common equity, retained earnings and new stock issues, and thus two costs of common equity.
• C)From the shareholders' perspective, the opportunity cost of retained earnings is the return the shareholders could earn by investing the funds in assets whose risk is similar to that of the firm.
• D)If the firm cannot invest its retained earnings to achieve a sufficient risk-adjusted return, shareholders would be better off receiving 100 percent of its net income as dividends.
• E)All of the above statements are correct.

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Definitions:

Annual Net Cash Flows

Annual net cash flows represent the amount of cash a company generates or loses within a year from its operating, investing, and financing activities.

Required Return

The minimum amount of profit or gain an investor expects to achieve from an investment to make it worthwhile.

Net Present Value Method

A financial modeling technique that evaluates the profitability of an investment by discounting future cash flows to their present value and subtracting the initial investment.

Cash Flows

The total amount of money being transferred into and out of a business, often analyzed to assess the financial health of an organization.