It is easier to incorporate the impact of flotation costs on the cost of equity capital in using the dividend growth model rather than the Security Market Line.

Question

Quizplus · Accepted Answer

The dividend growth model already incorporates the impact of flotation costs as it is based on the expected future dividends. On the other hand, the Security Market Line is calculated using the Capital Asset Pricing Model, which does not consider flotation costs directly. Therefore, it is easier to incorporate flotation costs when using the dividend growth model.

It Is Easier to Incorporate the Impact of Flotation Costs