Question

(U HII UI lie above 9. Which TWO of the following are correct reasons that could explain why most CFO's still rely on the CAPM to estimate cost of capital in spite of the fact that it fails to explain the returns on all stocks? (a) More investors still only care about the risks captured by the CAPM, and therefore the cost-of-capital given by the CAPM, than any other model (b) There is not necessarily a reliably better/generally accepted alternative model, and they have to use something (c) The CAPM estimates always underestimate the cost-of-capital, so CFOs can use the CAPM to deceive shareholders into believing their companies are worth more than is actually true (d) CFOs lack the technical ability to use anything more sophisticated than the CAPM (e) None of the above

Answer 1

5.C) The CAPM always underestimate the cost of capital so CFO can use the CAPM to deceive shareholders into believing their companies are worth more than is actually true.

A)Most investors still only care about the risk captured by CAPM,and therefore the cost of capital given by the CAPM, than any other model.