Which Method Is Best to Compute a Firm's Cost of Equity

question 10

Multiple Choice

Which method is best to compute a firm's cost of equity?

• A) CAPM
• B) Bond yield plus risk premium
• C) Constant growth model
• D) All of these methods
• E) None of these methods; use the current market price per share.

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Definitions:

Bond Principal

The face value of a bond, or the amount of money the bond issuer will pay back to the bondholder at maturity.

Serial Bonds

Bonds that are issued under the same contract but mature at different times, allowing the issuer to spread the repayment over several periods.

Principal Retirement

The act of paying off the original sum of money borrowed in a loan, excluding interest payments.

Unsecured Bond

A bond not backed by collateral, relying on the issuer's creditworthiness.