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.

---

Definitions:

Earnings Per Common Share

A measure of a company's profitability that calculates the net income available to common shareholders per share of common stock outstanding.

Indirect Method

A method of reporting the cash flows from operating activities that begins with net income and adjusts for revenues and expenses that do not involve the receipt or payment of cash.

Operating Activities

Business processes related to the core functions of a company that generate revenue, such as sales and production.

Net Income

The total profit or loss of a company after all revenues, expenses, taxes, and costs have been accounted for, typically reported on the bottom line of the income statement.