Which of the following is an advantage of the dividend growth approach over the SML in estimating the required return on equity?
A) The dividend growth model uses market information but the SML does not.
B) Dividend growth is known, whereas estimating beta for the SML is an art form.
C) It is easy to fit flotation costs into the dividend growth model but not the SML.
D) All are advantages of the dividend growth model for estimating the required return on equity.
Answer: C
Explanation: C) The dividend growth model solves for Re via Re = + g, but the SML has no obvious method to adjust for flotation costs.
You might also like to view...
Basic issues for companies that sell globally are the composition of the sales force in terms of nationality. List choices that are available to companies for selecting a sales force. Outline advantages and disadvantages of each choice
What will be an ideal response?
Discounting is the reverse process of compounding
Indicate whether the statement is true or false.