Relationship between franking credits and the market risk premium: a reply |
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Authors: | Stephen Gray Jason Hall |
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Institution: | UQ Business School, University of Queensland, Brisbane, 4072, Australia |
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Abstract: | We have previously documented an inconsistency between the dividend yield implied by the Officer (1994) model with standard Australian regulatory parameters and actual dividend yields of Australian companies. We have shown that, within the Officer framework, this inconsistency can be resolved by setting the assumed value of franking credits (γ) to zero, consistent with the practice of Australian firms and independent valuation experts. Truong and Partington (2008) and Lally (2008) recognize this same inconsistency and propose alternate ways of resolving it. In this paper, we demonstrate that these proposals are outside the Officer framework. The standard set of regulatory parameters cannot be resolved with observed dividend yields within the Officer framework. Whichever method is used to resolve the inconsistency, the effect will be an increase in the estimated after‐tax cost of equity. |
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Keywords: | Franking credits Cost of capital Dividend yields Market risk premium |
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