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

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.

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a.The investors are well diversified.

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

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

Explanation:

This is an assumption that both the cost of debt of a firm and the cost of equity are equal, though at times, this is not the case

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e.The investors always prefer to receive lower return on retained earnings than regular dividend payments.

Explanation:

This enables that dividends are reinvested back into the firm, which is part of an assumption in the CAPM model.

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