You are not currently logged in.
Access JSTOR through your library or other institution:
If You Use a Screen ReaderThis content is available through Read Online (Free) program, which relies on page scans. Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
The Application of the DCF Methodology for Determining the Cost of Equity Capital
Jeremy J. Siegel
Vol. 14, No. 1 (Spring, 1985), pp. 46-53
Stable URL: http://www.jstor.org/stable/3665360
Page Count: 8
You can always find the topics here!Topics: Dividends, Stock prices, Required rates of return, Investment return rates, Yield, Average prices, Revenue, Prices, Investors, Venture capital
Were these topics helpful?See something inaccurate? Let us know!
Select the topics that are inaccurate.
Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Preview not available
The proper use of the simple DCF formula requires that firms change their dividend levels quarterly and that the price of the stock be chosen on the ex-dividend date. This paper derives simple approximations that can be used when the above conditions do not apply. It is shown that failure to correct DCF calculations for firms that change dividends annually rather than quarterly results in a 1.7% overestimate of the true yield when the price of a stock is chosen early in the dividend year and a like underestimate when the price is chosen late in the year. Ignoring the accrued dividend between ex-dividend dates results in an underestimate of the required return by up to 3%. Furthermore, it is shown that the use of averaging periods to compute the price of a stock results in a very slight underestimate of the true return for a six-month averaging period, but a 1.4% underestimate for a one-year period.
Financial Management © 1985 Financial Management Association International