Which of the Following Statements Is CORRECT

question 49

Multiple Choice

Which of the following statements is CORRECT?

• A) If the calculated beta underestimates the firm's true investment risk¾i.e., if the forward-looking beta that investors think exists exceeds the historical beta¾then the CAPM method based on the historical beta will produce an estimate of rs 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 DCF 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:

Proper Consideration

The legal requirement for contracts, entailing something of value being exchanged between parties.

Consideration

Something of value promised to another when making a contract that compels them to enter into the agreement; an essential element in the formation of a legally binding contract.

Promise

A declaration or assurance that one will do something or that a particular thing will happen, often forming the basis of a contract.

Requirements Contract

A contract in which one party agrees to supply as much of a product or service as the other party needs.