To estimate the cost of equity capital for a ﬁrm using the CAPM, it is necessary to have:
A)company ﬁnancial leverage, beta, and the market risk premium.
B)company ﬁnancial leverage, beta, and the risk-free rate.
C)beta, company ﬁnancial leverage, and the industry beta.
D)beta, company ﬁnancial leverage, and the market risk premium.
E)beta, the risk-free rate, and the market risk premium.

Question

Quizplus · Accepted Answer

The CAPM (Capital Asset Pricing Model) requires the beta (a measure of a stock's volatility in relation to the market), the risk-free rate (the theoretical rate of return of an investment with zero risk), and the market risk premium (the return expected from the market above the risk-free rate) to estimate the cost of equity capital for a firm. Financial leverage is not a direct input in the CAPM formula.

To Estimate the Cost of Equity Capital for a ﬁRm