SSE/EFI Working Paper Series in 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.

Keywords: Financial analysis; abnormal earnings growth model; dividend policy; discounted dividends; free cash flow

41 pages, First version: December 19, 2008. Revised: March 10, 2009. Earlier revisions: February 25, 2009.

Download statistics

Published as

L. Peter Jennergren and Kenth Skogsvik, (2011), 'The Abnormal Earnings Growth Model, Two Exogenous Discount Rates, and Taxes', Journal of Business Finance & Accounting, vol 38, pages 505-535

• Stockholm School of Economics
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to Helena Lundin ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:hhb:hastba:2008_009This page generated on 2024-09-13 22:18:21.