A Unified Valuation Framework for Dividends, Free Cash Flows, Residual Income, and Earnings Growth Based Models PDF Download
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Author: Dhananjay (Dan) K. Gode
Publisher:
ISBN:
Category :
Languages : en
Pages : 21
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Book Description
Valuation techniques are important to practitioners and academics. Although theoretically equity value equals the present value of expected dividends, in practice, higher-level metrics such as free cash flows, earnings, and book values are used for valuation. This paper helps us understand these metrics by: (1) providing a common and simple theoretical framework that shows how these alternative valuation metrics can be used instead of dividends; (2) using the common framework to provide the theoretical underpinnings of earnings-based valuation.
Author: Dhananjay (Dan) K. Gode
Publisher:
ISBN:
Category :
Languages : en
Pages : 21
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Book Description
Valuation techniques are important to practitioners and academics. Although theoretically equity value equals the present value of expected dividends, in practice, higher-level metrics such as free cash flows, earnings, and book values are used for valuation. This paper helps us understand these metrics by: (1) providing a common and simple theoretical framework that shows how these alternative valuation metrics can be used instead of dividends; (2) using the common framework to provide the theoretical underpinnings of earnings-based valuation.
Author: Lucie Courteau
Publisher:
ISBN:
Category :
Languages : en
Pages : 52
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Book Description
Recently, Penman and Sougiannis (1998) and Francis, Olsson and Oswald (1999) compared the bias and accuracy of the dividend discount model (DDM), discounted cash flow model (DCF), and Edwards-Bell-Ohlson residual income model (RIM) in explaining the relation between value estimates and observed stock prices. Both studies report that, with non price-based terminal values, RIM outperforms DCF and DDM. Our primary research objective is to explore whether, over a five-year valuation horizon, DDM, DCF and RIM are empirically equivalent when Penman's (1998) theoretically quot;idealquot; terminal value expressions are employed in each model. Using Value Line terminal stock price forecasts at the horizon to proxy for such values, we find empirical support for the prediction of equivalence between these three price-based valuation models.Our secondary research objective is to demonstrate that, within each class of the DCF and RIM valuation models, the model that employs Value Line forecasted price in the terminal value expression will generate the lowest pricing errors, compared to models that employ non price-based terminal value under an arbitrary growth assumption. Results indicate that, for both DCF and RIM, price-based valuation models outperform the corresponding non price-based models by a wide margin. We also revisit the issue of the apparent superiority of RIM, and find that this result does not hold in a level playing field where an approximation of ideal terminal values is employed. In fact, the price-based RIM model is marginally outperformed by the price-based DCF and DDM models, in terms of pricing errors as well as its ability to explain current market price.
Author: Ralph Johann
Publisher: GRIN Verlag
ISBN: 3640158725
Category : Business & Economics
Languages : en
Pages : 28
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Book Description
Seminar paper from the year 2005 in the subject Business economics - General, grade: 1.3, California State University, Fullerton, course: Theory of Corporate Finance, language: English, abstract: This paper will deal with the procedure and implementations of firm/stock valuation using FCF approach and WACC – the weighted average cost of capital. On the road, the different approaches and methods of firm valuation, the various inputs of WACC and the final procedure finding the fair market value of the firm using Pro Forma Financial Statements, will be discussed. In this valuation method the two main parts contributing to the final value of the firm are Free Cash Flows (FCF) and the weighted average cost of capital. It is then used the time value of money concept along with some educated guesses about the long term sales growth rate and the long term WACC to apply common capital budgeting rules of project evaluation. Besides that, the paper will shortly discuss the influence of capital structure on a firm’s value. It will come out that there is a difference in value whether the company is leveraged and uses debt or not. When it comes to the different inputs of the WACC, a main focus will be on the required rate of return for shareholders. Finding the ‘right’ beta and an appropriate estimate for the market risk premium are the main issues of that part. Therefore, the CAPM model and its specific determinants will be analyzed. Thereafter, the nature of pro forma financial statements and the different parts of them will be defined. It will be described how the ‘free cash flows’ are determined and how that leads to the actual valuation procedure. Finally, the paper will focus on the terminal value as probably the most important and affecting part of the calculated firm value and its nature as a perpetuity in an investing perspective. The conclusion will finally deal with a critical assessment of the firm valuation process with the FCF method.
Author:
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
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
Author: William W. Priest
Publisher: Wiley
ISBN: 047012976X
Category : Business & Economics
Languages : en
Pages : 192
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Book Description
Praise for Free Cash Flow and Shareholder Yield "Free Cash Flow and Shareholder Yield provides a provocative solution to the profound paradigm shift now redefining valuation standards for markets around the globe. In commonsense terms, it defines how the investment community has begun the journey of shifting to the more dependable, robust metric of free cash flow." —Rob Brown, Chief Investment Officer, Genworth Financial Asset Management, Inc. This graph tells a singularly compelling story of the changing order of the drivers of total equity returns. In Free Cash Flow and Shareholder Yield, you will learn how this story is the key to informed investing in an evolving global marketplace.
Author: Clara Robinson
Publisher: Creek Ridge Publishing
ISBN:
Category : Business & Economics
Languages : en
Pages : 80
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Book Description
Unlock the power of dividend growth investing for a lifetime of wealth! Are you ready to take control of your financial future? Imagine a world where your investments work tirelessly for you, generating a steady flow of income and growing your wealth, even while you sleep. With the volatility of markets and the unpredictability of economies, securing your financial independence has never been more important. It’s not a question of if, but when you’ll need the resilience and stability that only a well-structured dividend growth investment strategy can provide. Here's a taste of what you can find inside: Unwavering Stability - Explore the unmatched potential of dividend aristocrats and how they anchor your portfolio in every market condition. Crystal-Clear Strategy - Gain precise, actionable guidance that demystifies the process of selecting and investing in top-performing dividend stocks. Financial Empowerment - Break free from financial uncertainties with robust strategies that ensure a growing income stream. Comprehensive Wealth Building - From foundational principles to advanced portfolio management, get equipped with everything you need for financial success. Skill Enhancement - Master the art of identifying and capitalizing on dividend growth opportunities to maximize your investment returns. Peace of Mind - Secure your financial future with strategies that protect and grow your wealth, no matter the economic climate. Simplified Success - A step-by-step guide that transforms complex investment concepts into a straightforward path to wealth accumulation. Envision Your Financial Transformation - Imagine achieving financial freedom and providing for your loved ones with ease. This book is the key to unlocking that reality, guiding you through the turbulent waters of investing with confidence and expertise.
Author: Julian Yeo
Publisher:
ISBN:
Category :
Languages : en
Pages : 46
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Book Description
Do investors price tax rebates on dividends? Since President George W. Bush's proposal to eliminate taxation of dividends at both the corporate and personal tax levels, there is a revival of interest on how dividend, corporate and personal taxes affect the pricing of equities. This study explores a setting, Australia, where corporate and personal tax systems are fully integrated in the form of an imputation tax system to examine the pricing of franked (tax-free) dividends using a valuation approach.A procedure is developed to simultaneously estimate the value of franked dividends, the cost of equity, and growth rates implied by share prices, book values, and analysts' earnings forecasts. The analysis is done on an after corporate tax but before personal tax basis by incorporating tax credits as part of payoffs. The estimation procedure employs a system of two equations that are equivalent price expressions based on different periods of earnings forecasts. Via simple manipulation and rearrangement, the system of equations leads to two (regression) relations with four estimates (two constant terms and two slope coefficients). The four estimates are functions of the implied value of franked dividends, the implied value of required rate of return, and the two implied growth rates based on different periods of earnings forecasts for a portfolio of firms.The estimation procedure is performed on a portfolio of firms followed by I/B/E/S from January 1st 1993 to December 31st 1999. The results show that investors do price the tax rebates with the estimates of a dollar of franked dividends being statistically greater than $1. In the estimation procedure, optimistic bias inherent in earnings forecasts would drive the estimate of market value of franked dividends upwards. Another estimation procedure is performed in a setting without imputation tax credits (i.e., the US) to examine the extent to which investors adjust one-year-ahead earnings downwards, knowing that these forecasts are, on average, optimistically biased. To the degree that forecast biases are comparable across the two countries (i.e., Australia and the US), the optimistic bias in earnings forecasts alone cannot fully explain the estimate of the value of franked dividends being greater than $1.
Author: Russell J. Lundholm
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
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.
Author: Xiaoquan Jiang
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Given the failure of the conventional dividend discount model to explain volatile, dynamic stock price movements, we test the empirical validity of an alternative model, the accounting-based residual income model (RIM), which posits that the current stock price equals the current book value of equity plus the present value of expected future residual income. We test two implications of the two models: volatility of prices relative to fundamentals and the model's dynamic implications by cross-equation restrictions. We find that, for stock valuation, book values and accounting earnings in the RIM contain more useful information than dividends alone.
Author: Qiang Cheng
Publisher:
ISBN:
Category :
Languages : en
Pages : 132
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Book Description
