An advantage to using the SML approach for calculating the cost of equity it that unlike the dividend growth model, the SML approach is not sensitive to the estimates used as inputs in the model.

Question

Quizplus · Accepted Answer

The SML approach, or Security Market Line approach, is sensitive to the estimates of the risk-free rate, the market risk premium, and beta, which are all inputs in the model and can significantly affect the calculated cost of equity.

An Advantage to Using the SML Approach for Calculating the Cost