{"id":54441,"date":"2024-04-16T00:10:14","date_gmt":"2024-04-16T00:10:14","guid":{"rendered":"https:\/\/exam.pscnotes.com\/mcq\/?p=54441"},"modified":"2024-04-16T00:10:14","modified_gmt":"2024-04-16T00:10:14","slug":"which-of-the-following-is-not-a-generally-accepted-approach-for-calculation-of-cost-of-equity","status":"publish","type":"post","link":"https:\/\/exam.pscnotes.com\/mcq\/which-of-the-following-is-not-a-generally-accepted-approach-for-calculation-of-cost-of-equity\/","title":{"rendered":"Which of the following is not a generally accepted approach for Calculation of Cost of Equity?"},"content":{"rendered":"

[amp_mcq option1=”CAPM” option2=”Dividend Discount Model” option3=”Rate of Pref. Dividend plus Risk” option4=”Price-Earnings Ratio” correct=”option4″]<\/p>\n

The correct answer is D. Price-Earnings Ratio.<\/p>\n

The cost of equity is the rate of return that a company must earn on its equity capital in order to satisfy its investors. It is a key factor in determining the company’s value and its ability to raise capital.<\/p>\n

There are a number of different approaches to calculating the cost of equity, but the most common are the Capital Asset Pricing Model (CAPM), the Dividend Discount Model (DDM), and the Weighted Average Cost of Capital (WACC).<\/p>\n

The CAPM is a theoretical model that calculates the cost of equity as a function of the risk-free rate, the market risk premium, and the company’s beta. The DDM calculates the cost of equity as the rate of return that equates the present value of the company’s future dividends to the current market price of its stock. The WACC is a weighted average of the cost of equity and the cost of debt, where the weights are determined by the company’s capital structure.<\/p>\n

The Price-Earnings Ratio (P\/E Ratio) is a measure of a company’s valuation that compares its stock price to its earnings per share. It is calculated by dividing the company’s stock price by its earnings per share. The P\/E Ratio is a popular measure of a company’s growth potential, but it is not a reliable measure of its cost of equity.<\/p>\n

The P\/E Ratio is not a generally accepted approach for calculating the cost of equity because it does not take into account the risk of the company’s investment projects. The cost of equity is a measure of the risk-adjusted return that investors require on their investment in the company. The P\/E Ratio does not take into account the risk of the company’s investment projects, so it is not a reliable measure of the cost of equity.<\/p>\n","protected":false},"excerpt":{"rendered":"

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