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A mature, stable corporation may consider computing their cost of equity using ____. Complete the sentence...

A mature, stable corporation may consider computing their cost of equity using ____. Complete the sentence by selecting the single best available answer from those presented below. Group of answer choices

using a Beta of 10

using a Beta of 5

the Capital Asset Pricing Model

the Dividend growth model

Solutions

Expert Solution

Ans: d the dividend growth model

Explanation: Dividend growth model is based on the steady and stable growth of dividend , that calculates the Present value of its dividend growth, and a modification of its terms can be used to assess the cost of equity, it is based on assumption of stable growth forever.

Option a and b is wrong since market beta is 1 and any firm having more than that can be very volatile, its reasonable to having beta range between 1 and 2 but beta of 5 and 10, is very much volatile and a stable firm cant have so much of beta.

Option c is also not seems correct, since this model is also depends on market risk premium and beta of firm, for a different risk investment, there can be different cost of equity, and for a stable corporation, it will provide different values based on their investments.

jeff jeffy answered 2 years ago
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