Which of the following statements is CORRECT?
a. If the calculated beta underestimates the firm's true investment risk?i.e., if the forward-looking beta that investors think exists exceeds the historical beta?then the CAPM method based on the historical beta will produce an estimate of rs and thus WACC that is too high.
b. Beta measures market risk, which is, theoretically, the most relevant risk measure for a publicly-owned firm that seeks to maximize its intrinsic value. This is true even if not all of the firm's stockholders are well diversified.
c. An advantage shared by both the DCF and CAPM methods when they are used to estimate the cost of equity is that they are both "objective" as opposed to "subjective," hence little or no judgment is required.
d. The specific risk premium used in the CAPM is the same as the risk premium used in the bond-yield-plus-risk-premium approach.
e. The discounted cash flow method of estimating the cost of equity cannot be used unless the growth rate, g, is expected to be constant forever.
b
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Which of the following is true of a buyer with an output contract?
A) The buyer cannot sue the seller in case the seller plans to share its output with another buyer. B) The buyer can choose to buy when and what he wants from the seller. C) The buyer is obliged to buy all the goods sold by the seller. D) The buyer cannot enforce the best-efforts clause in the output contract.