When the constant growth valuation model is used to find the cost of common stock equity capital, it can easily be adjusted for flotation costs to find the cost of new common stock; the Capital Asset Pricing Model (CAPM) does not provide a simple adjustment mechanism.

Question

Quizplus · Accepted Answer

This statement is true. The constant growth valuation model includes a built-in adjustment for flotation costs, which are the costs associated with issuing new shares of equity. On the other hand, the CAPM does not have a simple adjustment mechanism for factoring in flotation costs.

When the Constant Growth Valuation Model Is Used to Find