The Conventional Formula for the Nominal Growth Rate of Free Cash Flows is OK -- A Comment on Three Recent Papers in the Journal of Applied Corporate Finance
AbstractThe conventional formula for the nominal growth rate of free cash flows (equal to dividends when there is no interest-bearing debt) says that this growth rate is equal to the product of the plowback ratio and the nominal rate of return on the assets (the latter equal to book equity when there is no debt). In a recent issue of the Journal of Applied Corporate Finance, M. Bradley and G. A. Jarrell claim that the conventional formula is wrong when there is positive inflation, proposing instead an alternative formula. In a rejoinder to that paper in the same journal, G. Friedl and B. Schwetzler assert that the conventional formula is right. In a comment on Friedl and Schwetzler, Bradley and Jarrell reassert their original position, that is, the conventional formula is wrong and the alternative one is right. This note shows that the conventional formula is right and that both formulas give the same nominal growth rate. Consequently, both are OK.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Stockholm School of Economics in its series Working Paper Series in Business Administration with number 2011:6.
Length: 9 pages
Date of creation: 25 Nov 2011
Date of revision:
Contact details of provider:
Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, SE 113 83 Stockholm, Sweden
Phone: +46-(0)8-736 90 00
Fax: +46-(0)8-31 01 57
Web page: http://www.hhs.se/
More information through EDIRC
Gordon formula; nominal growth rate; free cash flows;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-14 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michael Bradley & Gregg A. Jarrell, 2008. "Expected Inflation and the Constant-Growth Valuation Model," Journal of Applied Corporate Finance, Morgan Stanley, vol. 20(2), pages 66-78.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Helena Lundin).
If references are entirely missing, you can add them using this form.