In Calculating the Cost of Common Stock Equity, ________

question 12

Multiple Choice

In calculating the cost of common stock equity, ________.

• A) the use of the capital asset pricing model (CAPM) is often preferred, because the data required are more readily available
• B) the use of the CAPM is preferred, because it directly considers risk and the effect of inflation on the stock prices
• C) the use of the constant-growth valuation model is often preferred, because the data required are more readily available
• D) the use of the constant-growth valuation model is often preferred, because it has a stronger theoretical foundation

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Definitions:

Expected Values

A statistical concept that calculates the average outcome when an action is repeated many times.

Disability Insurance

A type of insurance that provides income in the event a worker is unable to perform their work and earn money due to a disability.

Expected Utility

A theory in economics that calculates the utility expected from different outcomes, accounting for risk and uncertainty preferences of individuals.

Bet

A wager or stake placed on the outcome of an uncertain event, with the intention of winning money or material goods.