Estimation of Cost of Capital and its Reliability

39 Pages Posted: 1 Mar 2010 Last revised: 8 Aug 2017

See all articles by Wing-Keung Wong

Wing-Keung Wong

Asia University, Department of Finance

Date Written: February 28, 2010

Abstract

Gordon and Shapiro (1956) first equated the price of a share with the present value of future dividends and derived the well-known relationship. Since then, there are many improvement on the theory, for example, Thompson (1985, 1987) combined the "dividend yield plus growth"' method with Box-Jenkins time series analysis of past dividend experience to estimate the cost of capital and its credibility for individual firms while Thompson and Wong (1991, 1996) further extended the study of statistical time series methodology for estimating the cost of equity capital by proving the existence and uniqueness of the cost of capital and estimating its reliability. However, their approaches could not be used if the reliability does not exist or if there are multiple solution for the reliability. Wong and Chan (2004) extended the theory by proving the existence and uniqueness of the reliability. They further studied the properties of the cost of capital and simplify the estimation procedure. This paper discusses their contribution and the applications of the theory.

Keywords: Cost of Capital, Reliability, Dividend, Stock Price, Time Series Analysis

Suggested Citation

Wong, Wing-Keung, Estimation of Cost of Capital and its Reliability (February 28, 2010). Available at SSRN: https://ssrn.com/abstract=1561022 or http://dx.doi.org/10.2139/ssrn.1561022

Wing-Keung Wong (Contact Author)

Asia University, Department of Finance ( email )

Taiwan
Taiwan

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