Jennergren, L. Peter () (Dept. of Business Administration, Stockholm School of Economics) Skogsvik, Kenth () (Dept. of Business Administration, Stockholm School of Economics)
Abstract
In the abnormal earnings growth (AEG) model of Ohlson and Juettner-Nauroth (2005), there is one interest rate and no taxes. Their model focuses on bottom-line earnings and dividends and is hence viewed as an equity-level model. We first extend this model to a firm-level model based on operating earnings and free cash flows. We then allow for two exogenous interest rates: the required rate of return on equity under all-equity financing and the borrowing rate. A firm-level model is developed where dividends are discounted at the time-varying required rate of return on equity under partial debt financing. Using this firm-level model as a stepping stone, a new equity-level model is developed with dividends discounted at the required rate of return under partial debt financing. Dividend policy irrelevance holds. Finally, the firm-level and equity-level models are extended to a situation with company taxes. Dividend policy irrelevance then no longer holds.
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Length: 41 pages Date of creation: 19 Dec 2008 Date of revision:
25 Feb 2009 Handle: RePEc:hhb:hastba:2008_009
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