The text identifies three methods for estimating the cost of common stock from retained earnings: the CAPM method, the DCF method, and the bond-yield-plus-risk-premium method. Since we cannot be sure that the estimate obtained with any of these methods is correct, it is often appropriate to use all three methods, then consider all three estimates, and end up using a judgmental estimate when calculating the WACC. A. True B. False

Question

Denzel Howe

Business

22 February, 03:12

The text identifies three methods for estimating the cost of common stock from retained earnings: the CAPM method, the DCF method, and the bond-yield-plus-risk-premium method. Since we cannot be sure that the estimate obtained with any of these methods is correct, it is often appropriate to use all three methods, then consider all three estimates, and end up using a judgmental estimate when calculating the WACC. A. True B. False

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Answers (1)

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Edwin Dorsey · Answer 1

A. True

Explanation:

This is true, the estimate we get of the cost of common stock from retained earnings is not fully accurate. So we often use all three methods and then average out to use a reasonable estimate.