A Note on the Computation of the Equity Premium and the Market Value of Firm Equity

14 Pages Posted: 10 May 2010

See all articles by Burkhard Heer

Burkhard Heer

University of Augsburg; CESifo (Center for Economic Studies and Ifo Institute)

Alfred Maussner

University of Augsburg - Faculty of Business and Economics

Date Written: April 2010

Abstract

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

Heer, Burkhard and Maussner, Alfred, A Note on the Computation of the Equity Premium and the Market Value of Firm Equity (April 2010). CESifo Working Paper Series No. 3042. Available at SSRN: https://ssrn.com/abstract=1601189

Burkhard Heer (Contact Author)

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Alfred Maussner

University of Augsburg - Faculty of Business and Economics ( email )

Universitaetsstr. 16
86135 Augsburg
Germany
+49 821 598 4187 (Phone)
+49 821 598 4231 (Fax)

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