Which of the Following Statements Is CORRECT

question 83

Multiple Choice

Which of the following statements is CORRECT?

• A) If the calculated beta underestimates the firm's true investment risk⎯i.e., if the forward-looking beta that investors think exists exceeds the historical beta⎯then the CAPM method based on the historical beta will produce an estimate of r_s and thus WACC that is too high.
• B) Beta measures market risk, which is, theoretically, the most relevant risk measure for a publicly-owned firm that seeks to maximize its intrinsic value.This is true even if not all of the firm's stockholders are well diversified.
• C) An advantage shared by both the dividend growth model and CAPM methods when they are used to estimate the cost of equity is that they are both "objective" as opposed to "subjective," hence little or no judgment is required.
• D) The specific risk premium used in the CAPM is the same as the risk premium used in the bond-yield-plus-risk-premium approach.
• E) The discounted cash flow method of estimating the cost of equity cannot be used unless the growth rate, g, is expected to be constant forever.

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Definitions:

Problem-focused Coping

A coping strategy where one directly tackles a stressful situation by finding solutions to the problem causing the stress.

Pessimism

A predisposition towards perceiving negative outcomes or expecting the least favorable scenarios, accompanied by a deficiency in optimism or trust regarding what lies ahead.

Optimistic Outlook

A general expectation that good things will happen, or the belief that the future will be favorable.

External Locus of Control

The belief that one's outcomes in life are largely influenced by external forces beyond personal control.