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There are three methods for estimating the cost of common stock from reinvested earnings (not newly issued stock): the CAPM method, the DCF method, and the bond-yield-plus-risk-premium method. However, only the CAPM method always provides an accurate and reliable estimate. True or false?

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beritop1089

Answer:

False

Explanation:

Capital Asset Pricing Model(CAPM) of calculating cost of equity is not the accurate and reliable method making this statement false.

CAPM formula ; r = risk free rate + beta (Market return - risk free rate)

Its assumptions are have limitations as the beta is difficult to estimate since it is unstable and changes from time to time. Additionally, it is difficult to determine the correct risk free rate to use in the calculation.

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