Which one of the following statements is false? Beta is a measure of risk. "Market risk...

Which one of the following statements is false?

Beta is a measure of risk.

"Market risk premium” and “return on the market” are the same thing.

CAPM is an acronym for Capital Asset Pricing Model.

A disadvantage of using the dividend growth model to estimate the cost of equity is that it does not explicitly account for risk.

You should not use the coupon rate on outstanding debt as the cost of debt in WACC.

Solutions

Expert Solution

Second statement is false. "Market risk premium" and "return on market" are not the same thing. Market Risk Premium is excess of Return on Market over Risk Free rate.

Beta is a measure of systematic risk. Systematic risk is the "market risk" or "undiversifiable risk" inherent to the market.

CAPM is Capital Asset Pricing Model

Althouigh dividend discount model is used widely, there are some disadvantages associated with method - this method does not explicitly consider the risk of the investment, can be used only for dividend paying stocks/companies and also assumes constant rate of dividend.

Cost of debt in WACC is calculated by using YTM

jeff jeffy answered 1 year ago

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