In calculating the cost of common stock equity, the model which describes the relationship between the required return and the nondiversifiable risk of the firm is ________.
A) the constant-growth model
B) the NPV model
C) the variable growth model
D) the capital asset pricing model

Question

Quizplus · Accepted Answer

The capital asset pricing model (CAPM) describes the relationship between the required return and the nondiversifiable risk of the firm. It is commonly used to calculate the cost of common stock equity, taking into account the risk-free rate, the market risk premium, and the beta of the stock. A, B, and C are not models used for calculating the cost of common stock equity.

In Calculating the Cost of Common Stock Equity, the Model