Practice Question
Which of the following is NOT a method to estimate the cost of equity?
Answer +
E
Explanation +
Common methods to estimate the cost of equity include the Capital Asset Pricing Model (CAPM), the Dividend Discount Model (DDM), and the bond yield plus risk premium approach. However, the Weighted Average Cost of Capital (WACC) is a broader metric that incorporates both the cost of debt and the cost of equity to determine a firm’s overall cost of capital. Thus, WACC is not a specific method used solely to estimate the cost of equity.