Download or read book Comparative Implementation Study of the Residual Income and Discounted Cashflow Methods of Equity Valuation in the Context of UK Company Flotation written by Sarah L. Pedley and published by . This book was released on 2002 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book On Comparing Residual Income and Discounted Cash Flow Models of Equity Valuation written by Russell J. Lundholm and published by . This book was released on 2001 with total page 6 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the Summer 2001 issue of Contemporary Accounting Research we published a paper arguing that, given a full set of forecasted financial statements, the value estimates from a residual income model and a discounted cash flow model should yield identical results. The reason prior empirical studies (Penman and Sougiannis 1998 and Francis, Olsson and Oswald 2000) found differences between the models is because of subtle errors in the implementation of the models. Penman (2001) understandably takes issue with our paper, claiming that we are wrong on three points. We feel quite confident in our original paper and will rebut each of Penman's claims. Penman repeatedly states that he is interested in practical issues surrounding valuation. We share this interest; in fact, we were motivated to write our paper because of the common question raised by students and faculty: quot;why do I get a different answer from my discounted cash flow valuation than from my residual income valuation?quot; We still maintain that, if carefully done, there will be no difference in the valuations from these theoretically equivalent models. Our paper shows exactly how to do this and illustrates commonly made mistakes.

Download or read book Residual Income Versus Discounted Cash Flow Valuation Models written by Ali Atilla Perek and published by . This book was released on 2014 with total page 8 pages. Available in PDF, EPUB and Kindle. Book excerpt: Valuation plays a central role in the financing, investing and operating decisions of companies and many methods are employed to approximate the true value of a company. Although these techniques are based on similar theory, they may generate different results in application. This study incorporates an empirical approach to compare the outcomes of two different methods: residual income and discounted cash flow valuation models. The aim of this study is to test whether these methods result in different values and to contribute to the understanding of why these two valuation techniques, although similar in theory, may generate different results when applied to real life companies. There are a number of studies that compare these two methods theoretically. Some studies claim the superiority of one method over the other and some argue that these two methods should yield the same results when applied properly. In this study, the residual income and discounted cash flow models are applied to nine Turkish companies and the results are compared. We have obtained the data for the study with site visits to the companies and with the help of the managements of the companies.

Download or read book Three Residual Income Valuation Methods and Discounted Cash Flow Valuation written by Pablo Fernandez and published by . This book was released on 2019 with total page 12 pages. Available in PDF, EPUB and Kindle. Book excerpt: I show that the three residual Income models for equity valuation always yield the same value as the Discounted Cash Flow Valuation models.lt;brgt;lt;brgt;I use three residual income measures: Economic Profit (EP), Economic Value Added (EVA) and Cash Value Added (CVA). I first show that the present value of the EP discounted at the required return to equity plus the equity book value equals the value of equity (the present value of the Equity cash flow discounted at the required return to equity).lt;brgt;lt;brgt;Then, I show that the present value of the EVA discounted at the WACC plus the enterprise book value (equity plus debt) equals is the enterprise market value ( the present value of the Free cash flow discounted at the WACC).lt;brgt;lt;brgt;Then, I show that the present value of the CVA discounted at the WACC plus the enterprise book value (equity plus debt) is also equal to the enterprise market value.

Download or read book Valuation of loss carryforwards in the context of business valuation written by Ruben Kuhnle and published by GRIN Verlag. This book was released on 2020-01-23 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: Bachelor Thesis from the year 2019 in the subject Business economics - Investment and Finance, grade: 1.3, University of Hohenheim (Institut für Financial Management), language: English, abstract: This thesis concentrates on the Discounted Cash Flow (DCF) analysis. More specifically, it is worked with the Weighted-average Cost of Capital (WACC) method, the Adjusted Present Value (APV) method, and the Flow-to-Equity method . In addition, the focus is on tax loss carryforwards and the problem of how to incorporate the valuation of them into a DCF framework. Generally, two approaches are accepted for valuing loss carryforwards. One can either indirectly or directly determine the value of loss carryforwards. The thesis starts by explaining the fundamentals of business valuation and how the three DCF methods work. After that, a literature review is presented. The purpose of the literature review is to show the strategies others have developed to value loss carryforwards correctly. To show how to incorporate the valuation of loss carryforwards into a DCF framework, an example case was designed that involves two identical companies. The WACC method, the APV method, and the Flow-to-Equity method are applied and combined with the direct, as well as, the indirect method. When the results of the direct method are compared with the results of the indirect method for each one of the three DCF methods, it is concluded which of these approaches works, and gives a correct solution, and which one does not.

Download or read book Reconciling Value Estimates from the Discounted Cash Flow Model and the Residual Income Model written by Russell J. Lundholm and published by . This book was released on 2001 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines why practitioners and researchers get different estimates of equity value when they use a discounted cash flow (CF) model versus a residual income (RI) model. Both models are derived from the same underlying assumption - that price is the present value of expected future net dividends discounted at the cost of equity capital - but in practice and in research they frequently yield different estimates. We argue that the research literature devoted to comparing the accuracy of these two models is misguided; properly implemented, both models yield identical valuations for all firms in all years. We identify how prior research has applied inconsistent assumptions to the two models and show how these seemingly small errors cause surprisingly large differences in the value estimates.

Download or read book The Use of Residual Income Valuation Methods by U S Sell Side Equity Analysts written by John R. M. Hand and published by . This book was released on 2016 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the use of residual income (RI) valuation methods by U.S. sell-side equity analysts, particularly as compared to DCF. We document that RI valuations are rare -- just 1/16th as common as DCF -- and that different RI and DCF valuations are not infrequently provided by the same analyst for the same firm in the same report. We find that while analysts build their RI models around both net operating income (RNOA-RI) and net income (ROE-RI), analysts' RNOA-RI valuations are as optimistic as their DCF valuations and contain RNOAs that increase to an economically implausible terminal year median of 27%. In contrast, analysts' ROE-RI valuations contain ROEs that decline over the forecast horizon to a more plausible terminal year median of 17%. While optimistic when done on their own, analysts' ROE-RI valuations are unbiased when done in tandem with DCF, as are the DCFs that accompany them.

Download or read book Residual Income Information Dynamics and Equity Valuation written by Kwee Keong Choong and published by . This book was released on 2003 with total page 768 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The relevance of Discounted Cash Flow DCF and Economic Value Added EVA for the valuation of banks written by Dennis Schön and published by GRIN Verlag. This book was released on 2004-07-28 with total page 77 pages. Available in PDF, EPUB and Kindle. Book excerpt: Bachelor Thesis from the year 2003 in the subject Business economics - Investment and Finance, grade: 1,3 (A), Northumbria University (Newcastle Business School), language: English, abstract: This study investigates the underlying theories and assumptions of two modern capital market-based valuation approaches, the Discounted-Cash-Flow (DCF) and the Economic-Value-Added (EVA) approach, which are nowadays applied principally for industrial and manufacturing firms. This general examination is then transferred into a more specific investigation exploring whether these valuation concepts can be applied to the strongly regulated and more specific field of bank valuation. A questionnaire addressing bank analysts was created to analyse this question. The project indicates that the ideas of shareholder value which have been enforced over the last decade have implemented the need for a more shareholder-focused valuation. The application of DCF is basically attributed to this movement. It is revealed that this concept uses cash flow streams which depict a more realistic picture of an organization’s true earning power. Moreover, it employs a discount rate based on the capital market and thus reflecting the yield expectations of the investors. EVA, on the other hand is a relatively new concept, copyrighted in 1994 by Stern Stewart. It highlights an organization’s true economic profits. The study examines its components NOPAT, Capital and Cost of Capital, establishes a relation to DCF, points out some general limitations due to the fact that it falls back on accounting figures and critically assesses its dependence on the CAPM whose inherent assumptions of efficient markets that are not transferable into reality, might affect the valuation. The primary research undertaken finally reveals that the concepts of DCF and EVA are basically suitable to be applied to the valuation of banks. However, there are some peculiarities, primarily due to difficulties associated with the definition and measurement of debt and reinvestments which make slight adjustments in the valuation process indispensable. Nevertheless, the end result is just as effective as in other industries.

Download or read book Residual Income Based Equity Valuation written by Young-Soo Choi and published by LAP Lambert Academic Publishing. This book was released on 2010-09 with total page 280 pages. Available in PDF, EPUB and Kindle. Book excerpt: Following the seminal theoretical work of Ohlson (1995), many researchers have tried to investigate the linear information dynamics (LID) model's validity empirically. However, empirical applications of the LID approach to residual income (RI)-based equity valuation have produced estimates of firm value that are substantially lower on average than corresponding observed market values. This book augments the Ohlson model by incorporating residual income and 'other information' intercepts into the original linear information dynamics, in order to capture the impact of the intercept terms on the residual income forecasts and firm values. I argue that the large negative bias in LID-based value estimates might be attributable to failure to deal fully with the effects of conservative accounting in projecting residual income. The main objective of the book is thus to examine whether the 'intercept-inclusive' LID model produces more reliable value estimates than the extant RI-based valuation models. I also address a potentially important issue of the different applicability under different conditions of different RI-based valuation models.

Download or read book Implementing Residual Income Valuation Model written by A. G. Vlittis and published by . This book was released on 2000 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Equivalence between Discounted Cash Flow DCF and Residual Income Ri Su Tuong Duong Giua Dong Tien Chiet Khau Va Thu Nhap Rong written by Joseph Tham and published by . This book was released on 2003 with total page 20 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recently, the residual income (RI) model has become very popular in valuation because it purports to measure quot;value addedquot; by explicitly taking into account the cost for capital in the income statement. Some proponents of the residual income approach have even suggested that the RI model is superior to the discount cash flow (DCF) method and consequently, the DCF model should be abandoned in favor of the RI model. The residual income model is seductive because it purports to provide assessments of performance at any given point in time. The claim that the RI model is superior to the DCF model in valuation is puzzling because the RI model is simply an interesting algebraic rearrangement of the DCF model. Since the same information is used in both models, it is not unexpected that both models should give the same valuation results.In this paper, I examine the idea that the residual income model is superior to the discounted cash flow model. Using a simple numerical example, I show that in a M amp; M world, the two approaches to valuation are equivalent. In practice, the choice between the two valuation methods will be determined by the ease with which the relevant information is available.

Download or read book Extended Dividend Cash Flow and Residual Income Valuation Models written by and published by . This book was released on 2011 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Standard equity valuation approaches (i.e., DDM, RIM, and DCF model) are derived under the assumption of ideal conditions, such as infinite payoffs and clean surplus accounting. Because these conditions are hardly ever met, we extend the standard approaches, based on the fundamental principle of financial statement articulation. The extended models are then tested empirically by employing two sets of forecasts: (1) analyst forecasts provided by Value Line and (2) forecasts generated by cross-sectional regression models. The main result is that our extended models yield considerably smaller valuation errors. Moreover, by construction, identical value estimates are obtained across the extended models. By reestablishing empirical equivalence under non-ideal conditions, our approach provides a benchmark that enables us to quantify the errors resulting from individual deviations from ideal conditions, and thus, to analyze the robustness of the standard approaches. Finally, by providing a level playing field for the different valuation approaches, our findings have implications for other empirical settings, for example, estimating the implied cost of capital. -- Dirty Surplus ; Terminal Value ; Steady-State ; Valuation Error

Download or read book Residual Income Reversibility and the Valuation of Equity written by Mark Tippett and published by . This book was released on 2000 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Equivalence between Discounted Cash Flow DCF and Residual Income Ri written by Joseph Tham and published by . This book was released on 2003 with total page 18 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recently, the residual income (RI) model has become very popular in valuation because it purports to measure quot;value addedquot; by explicitly taking into account the cost for capital in the income statement. Some proponents of the residual income approach have even suggested that the RI model is superior to the discounted cash flow (DCF) method and consequently, the DCF model should be abandoned in favor of the RI model. The residual income model is seductive because it purports to provide assessments of performance at any given point in time. The claim that the RI model is superior to the DCF model in valuation is puzzling because the RI model is simply an interesting algebraic rearrangement of the DCF model. Since the same information is used in both models, it is not unexpected that both models should give the same valuation results.In this paper, I examine the idea that the residual income model is superior to the discounted cash flow model. Using a simple numerical example, I show that in a M amp; M world, the two approaches to valuation are equivalent. In practice, the choice between the two valuation methods will be determined by the ease with which the relevant information is available.

Download or read book DCF Business Valuation with Imputed Interest on the Stock of Equity written by Manfred Frühwirth and published by . This book was released on 2004 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: In the last two decades several European countries implemented tax systems allowing for the deduction of imputed equity interest from a company's tax base. This paper integrates the tax benefits resulting from imputed interest on the stock of equity into business valuation. Three discounted cash flow valuation methods are used to this end: the equity method, the APV method and the entity method. Intertemporal differences in risk require the use of various risk-adjusted term structures of interest rates in the equity method as well as the APV method. Using the equity method we show that the well-known market-to-book ratio of the constant growth dividend discount model holds in a risk-adjusted form. When applying the APV method with imputed equity interest an adjustment is necessary for each business, also for an unlevered company, to account for the tax shield resulting from equity financing. A closed-form solution is presented for the value of this tax benefit. We furthermore derive the WACC under imputed interest on the stock of equity and the adjustment of the cost of equity which is necessary to derive the WACC as a weighted average of cost of equity and debt.

Download or read book Reconciling Value Estimates from the Discounted Cash Flow Value Model and the Residual Income Model written by Russell J. Lundholm and published by . This book was released on 2001 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we investigate why the discounted cash flow model and residual income model frequently give different value estimates. We identify three common errors in the implementation of the models and show that these errors affect the models in different ways, creating differences in the value estimates that each produces. Our estimates of the size and direction of these errors roughly reconciles the observed differences in value estimates from papers attempting to quot;horse-racequot; the models. We also argue that any such contest is ill-conceived; given the same set of forecasted financial statements all models derived from the basic dividend-discounting assumption should yield the same value estimate. We discuss why claims of the residual income model's superiority over the discounted cash flow model, both on empirical and theoretical grounds, are misstated.