Final answer:
The recommended model to estimate the cost of common equity for a firm is the CAPM (Capital Asset Pricing Model).
Step-by-step explanation:
The recommended model to estimate the cost of common equity for a firm is the CAPM (Capital Asset Pricing Model).
The CAPM is widely used in finance and is based on the principle that the expected return on an investment should be proportional to its risk. It takes into account the risk-free rate, the market risk premium, and the beta of the stock to calculate the cost of equity for a firm.
By using the CAPM, investors can determine whether a firm's expected return is commensurate with its risk, enabling them to make informed investment decisions.