The Cost of Equity Can Be Inferred by Using the Capital

question 24

Multiple Choice

The cost of equity can be inferred by using the capital asset pricing model which:

• A)estimates that cost of equity as being approximately to cost of debt.
• B)calculates the cost of equity by applying the discount rate to the amount of equity being raised.
• C)estimates the cost of equity as approximately the average of the cost of equity over the last year.
• D)calculates the cost of equity as the risk-free rate of return plus the risk premium.

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Definitions:

Financial Option

A contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price.

Fixed Price

An agreed upon price for goods and services that remains constant, unaffected by the fluctuations in the market or resource costs.

Risk Averse

A description of an investor's preference for lower risk, opting for surety over a gamble with potentially higher returns but higher uncertainty.

Cash Flow

The net amount of cash and cash-equivalents being transferred into and out of a business, critical for daily operations, taxes, purchasing inventory, and paying employees.