A Note on the Computation of the Equity Premium and the Market Value of Firm Equity
14 Pages Posted: 10 May 2010
Date Written: April 2010
Turnovsky (1995) derives in a continuous-time model of a decentralized economy that the correct specification of the firm’s objective function is to maximize the initial value of its outstanding securities. The firm value is the discounted flow of real earnings. For the discrete-time version of the model, we show that the correct computation of the firm value needs to be modified. Depending on the specific formula employed, different values of the equity premium result.
Keywords: asset prices, firm value, equity premium
JEL Classification: G12, C63, E22, E32
Suggested Citation: Suggested Citation