Handle with care: cost of equity estimation with the discounted dividend model when corporations repurchase

Abstract

It is standard to use the discounted dividend model to estimate the cost of equity. The model is flawed, however, for corporations that repurchase shares. As many corporations have begun to repurchase significant amounts of their shares, the way this affects cost of equity estimates warrants study. This article illustrates that the discounted dividend model, as customarily applied, will lead to cost of equity estimates that are too low.