Hostname: page-component-78c5997874-lj6df Total loading time: 0 Render date: 2024-11-15T08:55:17.705Z Has data issue: false hasContentIssue false
  • English
  • Français

The Traditional Approach to Valuing Levered–Growth Stocks: A Clarification

Published online by Cambridge University Press:  19 October 2009

Robert A. Haugen  and
Prem Kumar
Get access Rights & Permissions [Opens in a new window]

Extract

The traditional valuation framework is unsuited to the task of valuing a growth stock when the capitalization rate is specified in terms of market leverage, simply because it is impossible to maintain a constant ratio of book to market leverage over the growth horizon. This severely limits the usefulness of the traditional model in analyzing the valuation problem. We have proposed a more general form of the model which allows us to show the consistency between M-M's Propositions I and II under growth.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 9 , Issue 6 , December 1974 , pp. 1031 - 1044
Copyright
Copyright © School of Business Administration, University of Washington 1974

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

[1]Brigham, E. F., and Gordon, M. J.. “Leverage, Dividend Policy, and the Cost of Capital.” Journal of Finance, vol. 23 (March 1968), pp. 85–103.CrossRefGoogle Scholar
[2]Crockett, J., and Friend, I.. “Some Estimates of the Cost of Capital to the Electric Utility Industry, 1954–57. Comment.” American Economic Review, vol. 57 (December 1967), pp. 1258–1267.Google Scholar
[3]Durand, D. “The Cost of Capital, Corporation Finance and the Theory of Investment: Comment.” American Economic Review, vol. 49 (September 1959), pp. 639–655.Google Scholar
[4]Durand, D. “Growth Stocks and the Petersburg Paradox.” Journal of Finance, vol. 12 (September 1957), pp. 348–363.Google Scholar
[5]Gordon, M. J. “Optimal Investment and Financing Policy.” Journal of Finance, vol. 18 (May 1963), pp. 264–272.Google Scholar
[6]Gordon, M. J. “Some Estimates of the Cost of Capital to the Electric Utility Industry, 1954–57. Comment.” American Economic Review, vol. 57 (December 1967), pp. 1267–1277.Google Scholar
[7]Gordon, M. J.The Investment, Financing and Valuation of a Corporation. Homewood, Ill.: Richard D. Irwin, 1962.Google Scholar
[8]Gordon, M. J., and Shapiro, Eli. “Capital Equipment Analysis: The Required Rate of Profit.” Management Science, vol. 3 (October 1956), pp. 102–110.CrossRefGoogle Scholar
[9]Gordon, M. J.. “The Savings, Investment and Valuation of the Corporation.” The Review of Economics and Statistics, vol. 43 (February 1962), pp. 37–51.CrossRefGoogle Scholar
[10]Graham, B.; Dodd, D.; and Cottle, S.. Security Analysis, 4th ed.New York, 1962.Google Scholar
[11]Hicks, J. R.Value and Capital. London: Oxford University Press, 1946.Google Scholar
[12]Hendriksen, E. S.Accounting Theory. Homewood, Ill.: Richard D. Irwin, 1965.Google Scholar
[13]Kumar, P. “Market Power, Growth, Leverage and the Valuation of the Firm.” Unpublished doctoral dissertation, University of Wisconsin, 1970.Google Scholar
[14]Lintner, J. “The Cost of Capital and Optimal Financing of Corporate Growth.” Journal of Finance, vol. 18 (May 1963), pp. 292–310.CrossRefGoogle Scholar
[15]Lintner, J. “Optimal Dividends and Corporate Growth under Certainty.” Quarterly Journal of Economics, vol. 78 (February 1964), pp. 49–95.CrossRefGoogle Scholar
[16]Lerner, E., and Carleton, W.. “The Integration of Capital Budgeting and Stock Valuation.” American Economic Review, vol. 54 (September 1964), pp. 683–702.Google Scholar
[17]Lerner, E.A Theory of Financial Analysis. New York, 1966.Google Scholar
[18]Malkiel, B. G. “Equity Yields, Growth, and the Structure of Share Prices.” American Economic Review, vol. 53 (December 1963), pp. 1004–1031.Google Scholar
[19]Malkiel, B. G. “The Valuation of Public utility Equities.” The Bell Journal of Economics and Management Science, vol. 1 (Spring 1970), p. 143.CrossRefGoogle Scholar
[20]Malkiel, B. G., and Cragg, John G.. “Expectations and the Structure of Share Prices.” American Economic Review, September 1970, p. 601.Google Scholar
[21]Modigliani, F., and Miller, M.. “The Cost of Capital, Corporation Finance, and the Theory of Investment.” American Economic Peview, vol. 48 (June 1958), pp. 261–297.Google Scholar
[22]Modigliani, F.. “The Cost of Capital, Corporation Finance, and the Theory of Investment: Reply.” American Economic Review, vol. 49 (September 1959), pp. 655–669.Google Scholar
[23]Modigliani, F.. “Corporate Income Taxes and the Cost of Capital: A Correction.” American Economic Review, vol. 53 (June 1963), pp. 433–443.Google Scholar
[24]Modigliani, F.. “Reply to Heins and Sprenkle.” American Economic Review, vol. 59 (September 1969), pp. 592–595.Google Scholar
[25]Miller, M., and Modigliani, E.. “Dividend Policy, Growth and the Valuation of Shares.” Journal of Business, vol. 34 (October 1961), pp. 411–433.CrossRefGoogle Scholar
[26]Miller, M.. “Some Estimates of the Cost of Capital to the Electric Utility Industry, 1954–57.” American Economic Review, vol. 56 (June 1966), pp. 331–391.Google Scholar
[27]Vickers, D. “The Cost of Capital and the Structure of the Firm.” Journal of Finance, vol. 25 (March 1970), pp. 35–46.Google Scholar
[28]Vickers, D.The Theory of the Firm: Production Capital and Finance. New York, 1968.Google Scholar
[29]Williams, J. B.The Theory of Investment Value. Cambridge, Mass., 1938.Google Scholar