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Footnotes 1 . John Peavy, “Stock Prices: Do Interest Rates and Earnings Really Matter,” Financial Analysts Journal (May‐June 1992), pp. 1112. 2 . There are several well‐known problems with using earnings for valuation purposes, including the failure of earnings to reflect investment requirements in working capital and fixed capital and the ability of corporate managers to manipulate reported earnings by changing accounting techniques. 3 . The expected market return can be calculated simply by transposing the terms of the model, such that k = D1 / P0 + g. 4 . See Steven G. Einhorn, “The Perplexing Issue of Valuation: Will the Real Value Please Stand Up?” Financial Analysts Journal (July‐August 1990) pp. 11–16. 5 . Other market observers who use forward‐looking as opposed to historic risk premiums also indicate that the market risk premium has declined significantly. See, for example, Martin Leibowitz and William Krasker, “The Persistence of Risk: Stocks vs. Bonds over the Long Term,” Financial Analysts Journal (Nov. ‐Dec. 1988). See also Keith Ambachtsheer, publisher of The Ambachtsheer Letter , who projects a risk premium of 2.0%. See Keith Ambachtsheer, “The Persistence of Investment Risk,” Journal of Portfolio Management (Fall 1989), pp. 69–71.
Journal of Applied Corporate Finance – Wiley
Published: Mar 1, 1995
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