All of the following methods can be used to estimate the cost of equity except:
A)Like debt and preferred stock,cash flows from common equity are fixed.
B)Firms have two sources of common equity,retained earnings and new stock issues,and thus two costs of common equity.
C)From the shareholders' perspective,the opportunity cost of retained earnings is the return the shareholders could earn by investing the funds in assets whose risk is similar to that of the firm.
D)If the firm cannot invest its retained earnings to achieve a sufficient risk-adjusted return,shareholders would be better off receiving 100 percent of its net income as dividends.
E)All of the above statements are correct.

Question

Quizplus · Accepted Answer

The statement "Like debt and preferred stock, cash flows from common equity are fixed." is incorrect. Unlike debt and preferred stock, common equity does not have fixed cash flows. The cost of equity is the return required by shareholders to compensate them for the risk associated with investing in the company's stock. It can be estimated using methods such as the capital asset pricing model (CAPM) or the dividend discount model (DDM).

All of the Following Methods Can Be Used to Estimate