Abstract
In the abnormal earnings growth (AEG) valuation model of Ohlson and Juettner-Nauroth (2005), there is one (constant) discount rate and no company or personal taxes. The parsimonious model specification focuses on bottom-line earnings and growth in abnormal bottom-line earnings and can hence be viewed as an equity-level model. Disregarding taxes, we first extend this model to a firm-level model based on operating earnings and growth in abnormal operating earnings, allowing for two exogenous discount rates: the required rate of return under all-equity financing and the borrowing rate. Dividend policy irrelevance holds for this model. Using the firm-level model as a stepping stone, a new equity-level model is developed where dividends are discounted at a leverage-dependent varying cost of equity capital. Dividend policy irrelevance holds for this model, too. Finally, the firm-level and equity-level models are extended to a situation with company and personal taxes. Dividend policy irrelevance then no longer holds, except in the tax-neutrality case in Miller (1977).