Relationship between franking credits and the market risk premium: a reply
Version of Record online: 27 FEB 2008
© The Authors
Accounting & Finance
Volume 48, Issue 1, pages 133–142, March 2008
How to Cite
Gray, S. and Hall, J. (2008), Relationship between franking credits and the market risk premium: a reply. Accounting & Finance, 48: 133–142. doi: 10.1111/j.1467-629X.2007.00243.x
The Australian Research Council provided funds for this project under grant DP03-42953.
- Issue online: 27 FEB 2008
- Version of Record online: 27 FEB 2008
- Received 18 January 2007; accepted 9 August 2007 by Robert Faff (Editor).
- Franking credits;
- Cost of capital;
- Dividend yields;
- Market risk premium
We have previously documented an inconsistency between the dividend yield implied by the Officer (1994) model with standard Australian regulatory parameters and actual dividend yields of Australian companies. We have shown that, within the Officer framework, this inconsistency can be resolved by setting the assumed value of franking credits (γ) to zero, consistent with the practice of Australian firms and independent valuation experts. Truong and Partington (2008) and Lally (2008) recognize this same inconsistency and propose alternate ways of resolving it. In this paper, we demonstrate that these proposals are outside the Officer framework. The standard set of regulatory parameters cannot be resolved with observed dividend yields within the Officer framework. Whichever method is used to resolve the inconsistency, the effect will be an increase in the estimated after-tax cost of equity.