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The N‐Stage Discount Model and Required Return: A Comment
Author(s) -
Bower Richard S.
Publication year - 1992
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1992.tb01311.x
Subject(s) - economics , dividend , rate of return , econometrics , equity (law) , financial economics , measure (data warehouse) , finance , computer science , database , political science , law
A number of financial economists have observed that estimates of the market discount rate have a downward bias when dividend timing is ignored. They have done so in academic and utility industry journals as well as in testimony. Most conclude or imply that such a downward bias carries over to the calculation of a regulated utility's required rate of return. This paper demonstrates that in fact the conventional cost of equity calculation, ignoring quarterly compounding and even without adjustment for fractional periods, serves very well as a measure of required return.