Which one of the following statements related to the Security Market Line approa
ID: 2737180 • Letter: W
Question
Which one of the following statements related to the Security Market Line approach to equity valuation is correct? Assume the firm includes debt in its capital structure.
This model considers a firm's rate of growth.
The model will never produce the same cost of equity as the dividend growth model.
The model is dependent upon a reliable estimate of the market risk premium.
This approach generally produces a cost of equity that equals the firm's overall cost of capital.
The model applies only to non-dividend-paying firms.
This model considers a firm's rate of growth.
The model will never produce the same cost of equity as the dividend growth model.
The model is dependent upon a reliable estimate of the market risk premium.
This approach generally produces a cost of equity that equals the firm's overall cost of capital.
The model applies only to non-dividend-paying firms.
Explanation / Answer
The model is dependent upon a reliable estimate of the market risk premium.
Equity is valued using nsk premium, premium is the rate over above the risk free rate.
as the capital structure forms debt also, equity valuation is done on the basis of one of the metrics, risk premium.
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