In comparing the constant growth model and the capital asset pricing model (CAPM) to calculate the cost of common stock equity,
A. the constant growth model ignores risk, while the CAPM directly considers risk as reflected in the beta.
B. the CAPM directly considers risk as reflected in the beta, while the constant growth model uses the market price as a reflection of the expected risk-return preference of investors.
C. the CAPM directly considers risk as reflected in the beta, while the constant growth model uses dividend expectations as a reflection of risk.
D. the CAPM indirectly considers risk as reflected in the market return, while the constant growth model uses dividend expectations as a reflection of risk.
Answer:B
In comparing the constant growth model and the capital asset pricing model (CAPM) to calculate the cost of common stock equity,
A. the constant growth model ignores risk, while the CAPM directly considers risk as reflected in the beta. B. the CAPM directly considers risk as reflected in the beta, while the constant growth model uses the market price as a reflection of the expected risk-return preference of investors. C. the CAPM directly considers risk as reflected in the beta, while the constant growth model uses dividend expectations as a reflection of risk. D. the CAPM indirectly considers risk as reflected in the market return, while the constant growth model uses dividend expectations as a reflection of risk.