When Estimating the Cost of Equity by Use of the CAPM

question 17

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 rRF, (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, RPM. These problems leave us unsure of the true value of rs.

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Definitions:

Money Supply

The total capital resources in monetary terms within an economy at a certain time.

Price Level

An index of the aggregate prices of all goods and services in an economy, often measured by a consumer price index or GDP deflator.

Inflation Tax

An implicit tax where the government benefits from inflation by reducing the real value of public debt, but it also reduces the purchasing power of money held by the public.

Central Bank

The main monetary authority of a country, which regulates the supply of money and interest rates, aiming to maintain price stability and economic growth.