Which of the following is an advantage of the dividend growth approach over the SML in estimating the required return on equity?
A) The dividend growth model uses market information but the SML does not.
B) Dividend growth is known, whereas estimating beta for the SML is an art form.
C) It is easy to fit flotation costs into the dividend growth model but not the SML.
D) All are advantages of the dividend growth model for estimating the required return on equity.
Answer: C
Explanation: C) The dividend growth model solves for Re via Re = + g, but the SML has no obvious method to adjust for flotation costs.
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