"The Investor Capitalization Theory of the Cost of Equity Capital": A Comment.

In the article, the author comments on the study "The Investor Capitalization Theory of the Cost of Equity Capital" by Walter Mortan, published in the August 1970 issue of the journal "Land Economics." The author in the article contends that the discounted cash flow techniques presented in the article is not theoretically inconsistent as Morton charges and it has regulatory value. According to the author, Morton defines the capitalization theory of economic value as the method of equating future income to present value by a discount rate. The author shows that establishing an appropriate revenue requirement, commensurate with current regulatory procedure, involves ascertaining the embedded costs of debt and preferred stock. The authors also find little pragmatic relief in Morton's alternative technique for estimating an appropriate rate of return by evaluating alternative investment opportunities of similar risk. In the author's opinion, forcing a choice between two potentially useful approaches to rate of return at this point reflects methodological chauvinism for one unmeasurable point of view over another unmeasurable point of view.