Which of the following statements (if any) is (are) true concerning companies th

Question

Which of the following statements (if any) is (are) true concerning companies that do not pay dividends?

The cost of equity capital can be estimated using the Capital Asset Pricing Model.
The cost of equity capital is equal to the growth short-term rate of earnings per share.
The dividend capitalization model can be used to determine an accurate cost of equity capital.
The cost of equity capital cannot be determined by using the CAPM, the risk premium on debt approach, or by estimating ke for comparable dividend-paying stocks in their industry.

Explanation / Answer

Which of the following statements (if any) is (are) true concerning companies that do not pay dividends?

The cost of equity capital can be estimated using the Capital Asset Pricing Model.

Note: As CAPM Formula

Cost of equity = Risk free rate + Beta*(Return on Market - Risk free rate)

Hence the dividend is not required to calculate Cost of equity using CAPM

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