Review of Accounting Studies

, Volume 10, Issue 2–3, pp 349–365 | Cite as

Expected EPS and EPS Growth as Determinantsof Value

  • James A. Ohlson
  • Beate E. Juettner-Nauroth


This paper develops a parsimonious model relating a firm’s price per share to, (i), next year expected earnings per share (or 12 months forward eps), (ii), short-term growth (FY-2 versus FY- l) 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 (Gordon/Williams) text-book approach, which equates the growth rates of expected eps and dps 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. A second key result inverts the valuation formula to show how one expresses cost-of-capital as a function of the forward eps to price ratio and the two measures of growth in expected eps. This expression generalizes the text-book equation in which cost-of-capital equals the dps-yield plus the growth in expected eps.


Equity valuation EPS EPS growth Dividend policy 

JEL Classification

M41 G12 G14 


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Copyright information

© Springer Science+Business Media, Inc. 2005

Authors and Affiliations

  • James A. Ohlson
    • 1
  • Beate E. Juettner-Nauroth
    • 2
  1. 1.W. P. Carey School of BusinessArizona State UniversityTempeUSA
  2. 2.Chair of BankingJohannes Gutenberg-UniversityMainzGermany

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