Implications of constant growth of abnormal earnings in perpetuity for equity premia, discount rates, earnings, dividends, book values and key financial ratios: an extension of Claus and Thomas
2005 (English)Report (Other academic)
We derive analytical formulas for the post-horizontal and asymptotic behavior of earnings, dividends, book value, and key financial ratios, as implied by the terminal value model of constant perpetual abnormal earnings growth. The implications of Claus and Thomas (2001) (CT) abnormal earnings growth forecasts for these quantities are examined and found reasonable. Analysis of the implicit functional relationships between the equity premium and the aforesaid quantities using CT's U.S. data reveals that a traditional premium of 8% implies 14% asymptotic growth in abnormal earnings, earnings, dividends and book value, and equally extreme asymptotic return-on-equity, price-to-earnings and price-to-book ratios.
Place, publisher, year, edition, pages
Social Science Electronic Publishing, Inc. , 2005. , 43 p.
, Working Paper Series
IdentifiersURN: urn:nbn:se:umu:diva-38787DOI: 10.2139/ssrn.333220OAI: oai:DiVA.org:umu-38787DiVA: diva2:382150