Question

The text identifies three methods for estimating the cost of common stock from reinvested earnings (not newly issued stock): the CAPM method, the dividend growth method, and the bond-yield-plus-risk-premium method. However, only the CAPM method always provides an accurate and reliable estimate. True False

Answer 1

False.

It is not only the CAPM method that always provides an accurate and reliable estimate. The three methods look at the same issue from three different angles.

Step-by-step explanation:

Despite their individual limitations, the methods have been found to provide some guidance to investors. The CAPM limitation lies in its use of historical data. The dividend growth method cannot be applicable to all firms, as it applies only to firms that pay dividend. Finally, the bond-yield-plus-risk-premium method suffers from the many unsubstantiated assumptions underlying it.