Which one of the following statements related to the capital asset pricing model approach to equity valuation is correct? Assume the firm uses debt in its capital structure.
Question 4 options:
A)The model applies only to non-dividend-paying firms.
B)The model is dependent upon a reliable estimate of the market risk premium.
C)The model generally produces the same cost of equity as the dividend growth model.
D)This approach generally produces a cost of equity that equals the firm's overall cost of capital.
E)This model considers a firm's rate of growth.

The difference between the anticipated return on a market portfolio and the risk-free rate is known as the market risk premium (MRP). The slope of the security market line (SML), a graphical representation of the capital asset pricing model, is equal to the market risk premium (CAPM). CAPM is a crucial component of discounted cash flow (DCF) valuation and modern portfolio theory (MPT), which measures the needed rate of return on equity investments. The difference between the anticipated return on a market portfolio and the risk-free rate is known as the market risk premium. It offers a numerical assessment of the additional return that market participants seek in exchange for the elevated risk.

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