Which One of the Following Statements Related to the SML

question 38

Multiple Choice

Which one of the following statements related to the SML approach to equity valuation is correct? Assume the firm uses debt in its capital structure.

• A)This model considers a firm's rate of growth.
• B)The model applies only to non-dividend paying firms.
• C)The model is dependent upon a reliable estimate of the market risk premium.
• D)The model generally produces the same cost of equity as the dividend growth model.
• E)This approach generally produces a cost of equity that equals the firm's overall cost of capital.

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Definitions:

Liabilities

Financial obligations or debts owed by a company to creditors, which must be settled over time through the transfer of assets, provision of services, or other economic benefits.

Assets

Resources owned or controlled by a business that are expected to produce economic value or benefits in the future.

Accounting Equation

A fundamental principle representing the relationship between an entity's assets, liabilities, and equity; Assets = Liabilities + Equity.

Creditor

An entity or person that lends money or extends credit to another party, expecting to be repaid in the future.