In calculating the cost of common stock equity, the model having the stronger theoretical foundation is
A) the constant growth model.
B) the Gordon model.
C) the variable growth model.
D) the capital asset pricing model.

Question

Quizplus · Accepted Answer

The capital asset pricing model (CAPM) is commonly used for calculating the cost of common stock equity and has a stronger theoretical foundation than other models. It takes into account the risk-free rate, market risk premium, and beta, which measures the stock's volatility relative to the overall market. This model is based on the efficient market hypothesis and is widely accepted in finance theory. The other models listed are useful in certain situations but do not have the same level of theoretical support as the CAPM.

In Calculating the Cost of Common Stock Equity, the Model