Which of the following methods of estimating the cost of common equity for a firm treats risk explicitly?
A) DCF method.
B) CAPM method.
C) Composite method.
D) Bond-yield-plus-risk-premium method.
E) Answers b and d are both correct.

Question

Quizplus · Accepted Answer

The CAPM (Capital Asset Pricing Model) method explicitly incorporates risk through the beta coefficient, which measures a stock's volatility relative to the market. The bond-yield-plus-risk-premium method adds a risk premium to the firm's long-term bond yield to estimate the cost of equity, also directly addressing risk.

Which of the Following Methods of Estimating the Cost of Common