Which of the following is a major assumption that is embedded in the capital asset pricing model (CAPM), which is often used to estimate the cost of retained earnings, rs?
A. All investors are well diversified.
B. The firm's dividends and earnings grow at a constant rate far into the future.
C. The firm's cost of equity and its cost of debt are always equal.
D. The firm's cost of retained earnings must be less than its cost of preferred stock for the CAPM to provide a reasonable estimate for rs.
E. Investors primarily purchase stocks with beta coefficients equal to zero.
Answer: A
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