Estimation of implied cost of equity models requires solving for unknowns. Usually, the models have lengthy equations and unknowns that call for deep root functions. There are five well-known models to find implied cost of equity. These models are listed below:
- Gebhardt et al. (2001),
- Claus and Thomas (2001),
- Ohlson and Juettner-Nauroth (2005),
- Easton (2004), and
- Gordon and Gordon (1997)
With the exception of Gordon and Gorden (1997) model, all other models require complex algebra to solve for the unknown i.e. the required rate of return. The good news is that we have developed an efficient and fast solution for all these models. We use the Mata capability of Stata Software to solve for the unknowns.
Furthermore, we also have developed Stata codes to find forecasted earnings using recently developed models such as Hou et al. (2012). Almost all implied cost of equity models use forecasted earnings. Therefore, the two set of codes compliment each other.
The code is available for $100/model, plus a $50 for raw data processing (in case the data is not in Stata format and variables are not already constructed). For further details, please contact us at:
- Claus, J., Thomas, J., 2001. Equity premia as low as three percent? Evidence from analysts’ earnings forecasts for domestic and international stock markets. Journal of Finance 56, 1629–1666.
- Easton, P., 2004. PE ratios, PEG ratios, and estimating the implied expected rate of return on equity capital. The Accounting Review 79, 73–95.
- Gebhardt, W., Lee, C.M., Swaminathan, B., 2001. Toward an implied cost of capital. Journal of Accounting Research 39, 135–176.
- Gordon, J., Gordon, M., 1997. The ﬁnite horizon expected return model. Financial Analysts Journal (May/June), 52–61.
- Hou, K., Van Dijk, M.A. and Zhang, Y., 2012. The implied cost of capital: A new approach. Journal of Accounting and Economics, 53(3), pp.504-526.
- Ohlson, J., Juettner-Nauroth, B., 2005. Expected EPS and EPS growth as determinants of value. Review of Accounting Studies 10, 349–365.