No abstract

This paper develops a version of the Capital Asset Pricing Model that views dividend imputation as affecting company tax and assumes differential taxation of capital gains and ordinary income. These taxation issues aside, the model otherwise rests on the standard assumptions including full segmentation of national capital markets. It also treats dividend policy as exogenously determined. Estimates of the cost of equity based on this model are then compared with estimates based on the version of the CAPM typically applied in Australia, which differs only in assuming equality of the tax rates on capital gains and ordinary income. The differences between the estimates can be material. In particular, with a high dividend yield, allowance for differential taxation can result in an increase of two to three percentage points in the estimated cost of equity. The overall result obtained here carries over to a dividend equilibrium, in which firms choose a dividend policy that is optimal relative to the assumed tax structure. Copyright (c) AFAANZ, 2003.

This paper shows that, when as usual the market portfolio is proxied by a share portfolio, then the conventional Ibbotson (1999) estimator of the market risk premium violates Miller-Modigliani (1958 and 1963) propositions II and III. A new estimator of the market risk premium is proposed which is free of these defects. In addition, across the range of market leverages experienced in the US in the period 1952-1997, it generates estimates of the market risk premium that differ from those generated by the Ibbotson methodology by up to 2.5 percentage points, and weighted average costs of capital for firms that differ by up to 2.6 percentage points. Copyright Blackwell Publishers Ltd 2002.

This paper examines two arguments presented in Gray and Hall (2006). First, that the generally used estimate of 0.06 for the market risk premium within the Officer version of the capital asset pricing model (CAPM) and the generally used estimate of 0.50 for the parameter 'gamma' within the Officer framework are jointly inconsistent with evidence concerning the market risk premium in the standard version of the CAPM. Second, that the first two of these parameter estimates are also jointly inconsistent with the observed cash dividend yield on the Australian market. To resolve these problems, Gray and Hall recommend setting gamma to zero. The present paper shows that the first argument does not account for the fact that imputation induces a reduction in the market risk premium as defined in the standard version of the CAPM. The present paper also shows that both arguments identify a problem that characterizes only parts of the Officer framework, and these parts are not generally used in Australia. Therefore, rather than suggesting that gamma should be zero, Gray and Hall's analysis identifies parts of the Officer framework that should be avoided. Copyright (c) The Authors.

The share valuation model which discounts expected dividends is widely accepted in the finance literature. Beyond some point a constant growth rate in expected ividends is assumed. The accepted specification of this growth rate involves a constant retention rate for earnings, and is valid under no inflation. This paper derives the corresponding nominal formula under inflation using a retention rate defined in terms of inflation accounted earnings, and shows that its real counterpart is the accepted formula. It is also shown under inflation that the nominal formula using a retention rate defined in terms of historic cost earnings is considerably more complicated, and that a major error in share valuation results from mistakenly assuming the accepted formula to be valid in nominal terms with a retention rate defined in terms of inflation accounted earnings.