Finance and Valuation Article Review (Essay Sample)

Student’s Name Professor’s Name Course Date Finance and Valuation Article Review Equity Premia as Low as Three Percent? SUMMARY In recent years, eight percent has been used to estimate equity premium. The main objective of this article is to demonstrate that this percentage is too high. After estimating each year since 1985, it becomes evident that the equity premium is only three percent and not eight percent, thus revealing a significant difference of five percent. The five large stock markets examined in this case are the United Kingdom, France, Japan, Canada, and Germany, providing the same results (Claus and Jacob 1630). In this case, it becomes apparent that the Ibbotson estimates overstate the equity premium. With the main aim of finding reasons for this, the authors apply the decomposition of observed returns (Claus and Jacob 1631). The first reason is the decline of conditional one-year-ahead equity premia. The second reason is the decline of the anticipated conditional long-term equity premium. The third reason is news about the growth of real dividends. The fourth reason is a decline in the expected real risk-free rate (Claus and Jacob 1631). I/B/E/S is the source of important financial data in the United States. The data types that can be accessed from I/B/E/S include the number of outstanding shares, earnings forecasts, share prices, dividends per share, and actual earnings per share (Claus and Jacob 1646). The book values for the United Kingdom, France, Japan, and Germany are collected from Datastream. In the case of Canada, Global Vintage and COMPUSTAT are the sources of book values. Datastream differs from COMPUSTAT and I/B/E/S because it drops inactive firms, a less frequent case outside the United States (Claus and Jacob 1646). In the case of the samples included by the authors of this article, only surviving firms were used. The study does not promote biases since the market valuations are equated with contemporaneous forecasts. At the same time, the study does not track their performance (Claus and Jacob 1646). The equity premiums are unbiased because of the efficiency of the earnings and market prices each year and incorporate similar information simultaneously. EVALUATION The authors of the study have done a commendable job of presenting facts. One of the areas of strength pertains to the detailed description of the procedures for collecting data. Also, the study outlines the sources of data. Describing procedures used to make conclusions and presenting the data sources increases a study's credibility level. Another strength demonstrated in the article is the use of different nations, thus promoting the comparison of different data sets. Doing so eliminates biases and helps to understand the study problem from various perspectives. Toward an Implied Cost of Capital SUMMARY The purpose of the study is to propose an alternative technique that accountants can use to estimate the cost of capital. The authors use market prices and residual income models in the new approach to estimate an implied cost of capital (Gebhardt et al. 135). The focus is on the United States stocks. The study's primary goals are to increase the understanding of the risks associated with the decision to invest in a firm's stock and the differences in this perception across industries and firms (Gebhardt et al. 136). The approach used in this study is different from prior empirical work because it heavily relies on average realized returns. In many regards, there have been unfortunate events where the cost of capital estimates from average returns have disappointed. In this study, authors estimate returns without considering traditional asset pricing models or realized returns (Gebhardt et al. 136). The utilization of discounted residual income model has been critical in this study, where it has played an imperative role in estimating an implied cost of capital. The academic literature is critical in understanding various concepts and procedures. However, unfortunately, it does not offer sufficient evidence of cost-of-capital differences across industries and firms (Gebhardt et al. 138). On the other hand, financial practitioners have been using varying versions of discounted cash flow models. The authors find out that implied risk premium is consistent in industries such as a...