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:

Allocative Efficiency

A state of resource allocation where goods and services are distributed according to consumer preferences, maximizing overall societal welfare.

Productive Efficiency

A situation where a firm or economy produces output at the lowest possible cost, using all its resources efficiently.

Pure Competition

A market structure characterized by a large number of small firms, a homogenous product, and very easy entry and exit from the market.

Spillovers

Effects of an economic activity that impact third parties who are not directly involved in the activity, potentially leading to externalities.