Which of following is a situation in which you would want to use the CAPM approach for estimating the component cost of equity?
A)When you are able to estimate the market risk premium with certainty.
B)When you are able to estimate the risk-free rate with certainty.
C)When you are able to estimate the firm's beta with certainty.
D)When the firm pays a constant dividend.

Question

Quizplus · Accepted Answer

The CAPM approach uses the firm's beta as a measure of systematic risk to estimate the cost of equity. Therefore, it would be most appropriate to use this approach when the firm's beta can be estimated with certainty. Estimating the market risk premium or the risk-free rate with certainty is not necessary for the use of CAPM, as these can be estimated based on historical data. The fact that the firm pays a constant dividend is not relevant to the use of CAPM.

Which of Following Is a Situation in Which You Would