QUESTION 7 Which of the following is an assumption in applying the capital asset
ID: 2803287 • Letter: Q
Question
QUESTION 7
Which of the following is an assumption in applying the capital asset pricing model (CAPM) to estimate the cost of equity capital?
The investors are well diversified.
The firm's dividends and earnings grow at a constant rate far into the future.
The cost of equity and the cost of debt of a firm are always equal.
D.The cost of retained earnings is lower than the cost of preferred stock due to the tax savings on earnings retained
quity capital?
QUESTION 7
Which of the following is an assumption in applying the capital asset pricing model (CAPM) to estimate the cost of equity capital?
A.The investors are well diversified.
B.The firm's dividends and earnings grow at a constant rate far into the future.
C.The cost of equity and the cost of debt of a firm are always equal.
D.The cost of retained earnings is lower than the cost of preferred stock due to the tax savings on earnings retained
quity capital?
Explanation / Answer
THE ASSUMPTIONS OF CAPM MODEL are the limitations for applying CAPM to the cost of equity.
The assumptions are
a)Investors hold diversified portfolio
b) Investors can lend and borrow at risk free rate of return
c) There is only a single period transaction cost horizon
d) There is always a perfect capital market existing.
So, the answer is Option A
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