Abstract
Abstract: In the abnormal earnings growth (AEG) valuation model of Ohlson and Juettner‐Nauroth (2005), there is one (constant) discount rate and no company or personal taxes. The parsimonious model specification focuses on bottom‐line earnings and growth in abnormal bottom‐line earnings and can hence be viewed as an equity‐level model. Disregarding taxes, we first extend this model to a firm‐level model based on operating earnings and growth in abnormal operating earnings, allowing for two exogenous discount rates: the required rate of return under all‐equity financing and the borrowing rate. Dividend policy irrelevance holds for this model. Using the firm‐level model as a stepping stone, a new equity‐level model is developed where dividends are discounted at a leverage‐dependent varying cost of equity capital. Dividend policy irrelevance holds for this model, too. Finally, the firm‐level and equity‐level models are extended to a situation with company and personal taxes. Dividend policy irrelevance then no longer holds, except in the tax‐neutrality case in Miller (1977).
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