Expected EPS and EPS Growth as Determinants of Value

  • James A. Ohlson, Beate E. Juettner-Nauroth
  • Published 2000

Abstract

This paper develops a parsimonious model relating a firm's price per share to, (i), next year expected earnings per share (eps), (ii), short term growth (FY-2 vs. FY.1) in eps, (iii), long-term (asymptotic) growth in eps, and, (iv), cost-of equity capital. The model assumes that the present value of dividends per share (dps) determines price, but it does not restrict how the dps-sequence is expected to evolve. All of these aspects of the model contrast sharply with the standard textbook approach, which equates the growth rates of expected dps and eps and fixes the growth rate and the payout rate. Though the constant growth model arises as a peculiar special case, the analysis in this paper rests on more general principles, including dividend policy irrelevancy. In addition to the valuation formula, a key result shows how one expresses cost-of-capital as a function of next-year expected eps and the two measures of growth in expected eps. This expression generalizes the textbook equation in which cost-of-capital equals dps-yield plus the growth in expected eps.

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@inproceedings{Ohlson2000ExpectedEA, title={Expected EPS and EPS Growth as Determinants of Value}, author={James A. Ohlson and Beate E. Juettner-Nauroth}, year={2000} }