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Handle with care: cost of equity estimation with the discounted dividend model when corporations repurchase

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  • Douglas Lamdin

Abstract

It is standard to use the discounted dividend model to estimate the cost of equity. The model is flawed, however, for corporations that repurchase shares. As many corporations have begun to repurchase significant amounts of their shares, the way this affects cost of equity estimates warrants study. This article illustrates that the discounted dividend model, as customarily applied, will lead to cost of equity estimates that are too low.

Suggested Citation

  • Douglas Lamdin, 2001. "Handle with care: cost of equity estimation with the discounted dividend model when corporations repurchase," Applied Financial Economics, Taylor & Francis Journals, vol. 11(5), pages 483-487.
    • Handle: RePEc:taf:apfiec:v:11:y:2001:i:5:p:483-487
    DOI: 10.1080/09603100110067024
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    References listed on IDEAS

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    1. Ikenberry, David & Lakonishok, Josef & Vermaelen, Theo, 1995. "Market underreaction to open market share repurchases," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 181-208.
    2. Lamdin, Douglas J & Hiemstra, Craig, 1993. "Ex-dividend Day Share Price Behavior: Effects of the Tax Reform Act of 1986," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 778-783, November.
    3. Vafeas, Nikos & Maurice Joy, O., 1995. "Open market share repurchases and the free cash flow hypothesis G35," Economics Letters, Elsevier, vol. 48(3-4), pages 405-410, June.
    4. Farris M. Maddox & Donna T. Pippert & Rodney N. Sullivan, 1995. "An Empirical Study of Ex Ante Risk Premiums for the Electric Utility Industry," Financial Management, Financial Management Association, vol. 24(3), Fall.
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