When estimating the cost of equity by use of the DCF method, the single biggest potential problem is to determine the growth rate that investors use when they estimate a stock's expected future rate of return. This problem leaves us unsure of the true value of rs.

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Quizplus · Accepted Answer

This is true, as the growth rate assumption has a significant impact on the calculation of the cost of equity using the DCF method. A slight overestimation or underestimation of the growth rate can lead to a significant deviation of the estimated cost of equity from the true value.

When Estimating the Cost of Equity by Use of the DCF