By deriving the implied dividend growth rate from earnings growth rates, the method of Donaldson and Kamstra [1996] is extended to provide formal fundamentals valuation fo firms that pay out no dividends. No previous work known to me has succeeded in providing formal fundamentals valuation for non-dividend-paying equity, though there is no shortage of ad hoc approaches. Extension of this method to pricing initial public offerings (IPOs) is also provided. Careful analysis of price-dividend ratios reveals these ratios are not able to provide more than a forward-looking estimate of the mean of discounted dividend growth rates. Finally, it can be formally shown that the price-earnings ratio for firms that pay no dividends is equivalent to and conveys the same information as the price-dividend ratio for firms paying out dividend
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Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number
dp99-11.
Length: 22 pages Date of creation: 1999 Date of revision: Handle: RePEc:sfu:sfudps:dp99-11
Contact details of provider: Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada Phone: (778)782-3508 Fax: (778)782-5944 Web page: http://www.econ.sfu.ca/ More information through EDIRC