To estimate the cost of equity capital for a firm using APT or 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 cost of equity capital using APT (Arbitrage Pricing Theory) or CAPM (Capital Asset Pricing Model) requires the beta (a measure of the 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 additional return expected from holding a risky market portfolio instead of risk-free assets). These components are essential for calculating the expected return on equity according to these models.

To Estimate the Cost of Equity Capital for a Firm