Full text: Capital Gains in Economic Theory and National Accounting

13 
The price of the asset is ultimately based on what it yields 
(dividend for a share, rent for land). For anybody, however, who 
is not determined to hold the asset for ever the expected future 
price will also be important. The full return on the asset will 
therefore consist of two terms 
Return = Yield + appreciation, 
r = y + a. 
In the simplest case if the yield, say the dividend, is constant 
as a proportion of the asset price and the rate of return r is 
also constant the asset price A will be 
A t = R/r = ( yA t + aA t )/r where a = ( A t+1 /A t - 1 ) . 
The present price depends, therefore, on the future price of the 
asset. The rate of return of the share r will be higher than what 
you would get from holding a bond at fixed interest because of the 
greater risk involved in the investment. 
What course of events can justify a continuous increase in the 
price of the asset (the share) that is, a positive a ? The answer 
is: The internal accumulation of retained profits in the firm 
which will make it possible in future to pay dividends at a 
constant rate on an increasing value of the share. We may then 
regard a also as an estimate of the increase in the real earning 
capacity of the firm which, if it happens to be realistic will 
make it possible for the price of the share to rise continuously 
without the holders being ultimately disappointed. 
Now the above considerations are very abstract: They do not tell 
us what happens, how the share prices are formed, they tell us 
only what would have to happen if a smooth development were to 
result. In reality it is important that there are two types of 
holders of shares: The long term holder is strongly interested in 
the dividend. For him the knowledge of the future dividends would 
be quite sufficient to make a clear decision. The short term
	        

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