Fundamental Valuation of Zero-Dividend Firms

Simon Fraser University Department of Economics Working Paper

26 Pages Posted: 15 Jul 2000

See all articles by Mark J. Kamstra

Mark J. Kamstra

York University - Schulich School of Business; Rady School of Management

Date Written: June 2000


The calculation of the fundamental price of a zero-dividend firm is accomplished here exploiting the Miller and Modigliani [1961] dividend irrelevance result, the earnings stream of the firm, and an extension of the Donaldson and Kamstra [1996] method of calculating a dividend-paying firm's fundamental price. This extension of Donaldson and Kamstra provides a new methodology for calculating fundamental asset prices when all earnings are retained. The pricing of initial public stock offerings is also accommodated. This method is illustrated by pricing Microsoft stock using only earnings and discount rates. The resulting fundamental forecasts of annual returns to holding Microsoft shares are highly correlated with market returns, with a regression of market returns on fundamental return (out-of-sample) forecasts yielding an r-squared of over 50%, greatly exceeding the performance of conventional valuation methods. This suggests that if an accurate forecast for earnings for the coming year were available, the fundamental model developed here holds the promise of reliable forecasting of price changes, even with the use of a very limited information set.

Keywords: Fundamental asset pricing

JEL Classification: G12

Suggested Citation

Kamstra, Mark J., Fundamental Valuation of Zero-Dividend Firms (June 2000). Simon Fraser University Department of Economics Working Paper, Available at SSRN: or

Mark J. Kamstra (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3

Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

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