Abstract

http://ssrn.com/abstract=722664
 
 

References (31)



 
 

Citations (3)



 


 



Estimating Firm-specific Long-term Growth Rate and Cost of Capital


Rong Huang


City University of New York (CUNY) - Stan Ross Department of Accountancy

Ramachandra (Ram) Natarajan


University of Texas at Dallas - Department of Accounting & Information Management

Suresh Radhakrishnan


University of Texas at Dallas - School of Management

May 2005


Abstract:     
We use the residual-income valuation model to simultaneously estimate firm-specific implied long-term growth rate in abnormal earnings and cost of capital by relating earnings-to-price and book-to-market ratios in a linear fashion. This simple framework estimates investors' consensus beliefs with respect to the long-term growth rate of abnormal earnings and the corresponding cost of capital embedded in the stock price. Empirical results show that the growth rate and cost of capital estimates obtained from this model and that of Easton [2004] exhibit desirable properties. Specifically, both cost of capital estimates, controlled for growth, are predictably related to various previously documented firm-specific factors. The cost of capital estimates using this and the Easton [2004] procedure are also positively related to one-year-ahead returns, especially when the change in cost of capital and growth are controlled. Overall, we show the importance of considering return decomposition as well as controlling for growth when assessing the relationship between cost of capital and various risk factors.

Number of Pages in PDF File: 59

Keywords: Cost of capital, risk premium, implied growth rate, residual-income

JEL Classification: C53, G12, G31, M41

working papers series


Download This Paper

Date posted: May 17, 2005  

Suggested Citation

Huang, Rong and Natarajan, Ramachandra (Ram) and Radhakrishnan , Suresh, Estimating Firm-specific Long-term Growth Rate and Cost of Capital (May 2005). Available at SSRN: http://ssrn.com/abstract=722664 or http://dx.doi.org/10.2139/ssrn.722664

Contact Information

Rong Huang
City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )
One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
(646)312-3204 (Phone)
Ramachandra (Ram) Natarajan
University of Texas at Dallas - Department of Accounting & Information Management ( email )
2601 North Floyd Road
Richardson, TX 75083-0688
United States
972-883-2739 (Phone)
Suresh Radhakrishnan (Contact Author)
University of Texas at Dallas - School of Management ( email )
2601 North Floyd Road
Richardson, TX 75083-0688
United States
972-883-4438 (Phone)
972-883-6811 (Fax)
Feedback to SSRN


Paper statistics
Abstract Views: 3,073
Downloads: 654
Download Rank: 20,115
References:  31
Citations:  3

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo7 in 0.312 seconds