QUESTION 7

Which of the following is an assumption in applying the capital asset pricing model (CAPM) to estimate the cost of equity capital?

A.

The investors are well diversified.

B.

The firm's dividends and earnings grow at a constant rate far into the future.

C.

The cost of equity and the cost of debt of a firm are always equal.

D.The cost of retained earnings is lower than the cost of preferred stock due to the tax savings on earnings retained

quity capital?