QUESTHJN 12 Compute the cost of internal equity based on the Security Market Line. |l'.'ompare this to the cost of equity found using the Discounted Cash Flow model. Which. if either, do you think is more correct? Explain. ANSWER SML-SECURTW MARKET LINE SML EQUATEDN. Rs= er+ [Rm- eri 3. Giving, eriTreasury bonds}=5% RpmlMarket risk premium}: Rm - er = 6.2% 13 (beta, Valueline market beta} = 1.35 Hence, Rs = 5% + (6.2}135 = 5% + 3.3? Rs = 13.31% (Normal risk scenario}. It was decided to acid a 2% risk premium to the company cost of capital. Hence the high-risk scenario is 13.31% + 2% -15.3?%. DISCOUNTED CASH FLOW METHOD The cost of equity found using the discounted cash flows model was 14.32% as shown in Question 5. The differences between the 13.33% and the 14.32% are as a result of the use of estimates of B and RM in the computation of the rate under each model