Relationship between Franking Credits and the Market Risk Premium: A Reply

10 Pages Posted: 29 Feb 2008

See all articles by Stephen Gray

Stephen Gray

University of Queensland - Business School; Duke University - Fuqua School of Business; Financial Research Network (FIRN)

Jason Hall

University of Michigan, Stephen M. Ross School of Business

Date Written: 2007-08-09

Abstract

We have previously documented an inconsistency between the dividend yield implied by the Officer (1994) model with standard Australian regulatory parameters and actual dividend yields of Australian companies. We have shown that, within the Officer framework, this inconsistency can be resolved by setting the assumed value of franking credits (³) to zero, consistent with the practice of Australian firms and independent valuation experts. Truong and Partington (2008) and Lally (2008) recognize this same inconsistency and propose alternate ways of resolving it. In this paper, we demonstrate that these proposals are outside the Officer framework. The standard set of regulatory parameters cannot be resolved with observed dividend yields within the Officer framework. Whichever method is used to resolve the inconsistency, the effect will be an increase in the estimated after-tax cost of equity.

Suggested Citation

Gray, Stephen and Hall, Jason L., Relationship between Franking Credits and the Market Risk Premium: A Reply (2007-08-09). Accounting & Finance, Vol. 48, Issue 1, pp. 133-142, March 2008. Available at SSRN: https://ssrn.com/abstract=1100198 or http://dx.doi.org/10.1111/j.1467-629X.2007.00243.x

Stephen Gray (Contact Author)

University of Queensland - Business School ( email )

University of Queensland
Brisbane, Queensland 4072
Australia

Duke University - Fuqua School of Business

Box 90120
Durham, NC 27708-0120
United States

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Jason L. Hall

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street, Ross School of Business
University of Michigan
ANN ARBOR, MI MI 48104
United States
+1 734 926 6989 (Phone)

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