If the CAPM Is Used to Estimate the Cost of Equity

question 2

Multiple Choice

If the CAPM is used to estimate the cost of equity capital the expected excess market return is equal to:

• A) the return on the stock minus the risk-free rate.
• B) the difference between the return on the market and the risk-free rate.
• C) the beta times the market risk premium.
• D) the beta times the risk-free rate.
• E) the market rate of return.

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Definitions:

Stockholders' Equity

The portion of a company's assets that remains following the deduction of all liabilities, signifying the ownership interest of its shareholders.

Revenues

The total income generated from normal business operations and other activities over a period of time.

Expenses

Outflows or utilizing of assets, incurring liabilities resulting from operating activities, typically categorized into cost of goods sold, operating expenses, and non-operating expenses.

Chart Of Accounts

A systematic listing of all account titles and numbers being used by an organization to track its financial transactions and to prepare financial statements.