Which of the following statements is most correct?
A) The CAPM approach to estimating a firm's cost of common stock never gives a better estimate than the DCF approach.
B) The CAPM approach is typically used to estimate a firm's cost of preferred stock.
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 rs.
E) The statements above are all false.

Question

Quizplus · Accepted Answer

A) The CAPM approach can sometimes provide a better estimate than the DCF approach, depending on the availability and reliability of the data.
B) The CAPM approach is used to estimate the cost of common stock, not preferred stock.
C) The bond-yield-plus-risk-premium method uses a different risk premium than the CAPM method.
D) In practice, the DCF method and the CAPM method can produce different estimates for rs due to different assumptions and inputs used. Therefore, it is important to use multiple methods to triangulate a firm's cost of common stock.

Which of the Following Statements Is Most Correct