Which of the following statements is correct? A) Under normal conditions,the CAPM approach to estimating a firm's cost of retained earnings gives a better estimate than the DCF approach. B) The CAPM approach is typically used to estimate a firm's flotation cost adjustment factor,and this factor is added to the DCF cost estimate. C) The risk premium used in the bond-yield-plus-risk-premium method is the same as the one used in the CAPM method. D) In practice (as opposed to in theory),the DCF method and the CAPM method usually produce exactly the same estimate for r_s. E) The above statements are all false.

Question

Quizplus · Accepted Answer

None of the statements are true. A) is incorrect as the DCF approach is generally considered to give a better estimate. B) is incorrect as the CAPM approach is used to estimate the cost of equity, not the flotation cost adjustment factor. C) is incorrect as the risk premium used in the bond-yield-plus-risk-premium method is typically higher than the one used in the CAPM method. D) is incorrect as the DCF and CAPM methods can produce different estimates due to differences in assumptions and inputs.

Which of the Following Statements Is Correct