Cost of Common Equity: Methods that Explicitly Treat Risk | CFA® Level 1 Test Prep

Estimating the Cost of Common Equity: Risk Treatment

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Question

Which of the following methods of estimating the cost of common equity for a firm treats risk explicitly?

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Explanations

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A. B. C. D. E.

C

In the CAPM approach, the stock's beta coefficient must be estimated, which is used as an index of the stock's risk. In the bond-yield-plus-risk-premium method the risk premium is judgmentally added to the interest rate on the firm's own long-term debt.