SOME NOTES ON THE COST OF NEW EQUITY

The discounted cash flow (DCF) approach is one of the most widely used estimation techniques. Attention is focused on correcting 2 errors that are frequently made when the discounted cash flow model is used to estimate the cost of common equity. The first error involves the frequency of payment of d...

Full description

Saved in:
Bibliographic Details
Published in:Journal of business finance & accounting 1984-06, Vol.11 (2), p.245-251
Main Author: Beedles, William L.
Format: Article
Language:English
Subjects:
Capital assets
Common stock
Costs
Discounted cash flow
Equity
Pricing
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The discounted cash flow (DCF) approach is one of the most widely used estimation techniques. Attention is focused on correcting 2 errors that are frequently made when the discounted cash flow model is used to estimate the cost of common equity. The first error involves the frequency of payment of dividends. Most users employ some expectation for the coming year, even though actual payments are usually made quarterly. It is shown that the correct treatment calls for stating all of the variables on a quarterly basis and then annualizing them. The second problem concerns the importance of recognizing the source of flotation costs when new equity is sold. It is shown that cash flows that affect only newly issued shares have a nearly trivial impact on the required equity return, while the price pressure effect may have a huge impact, since it influences all of the company's outstanding shares.
ISSN:0306-686X
1468-5957
DOI:10.1111/j.1468-5957.1984.tb00072.x