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Author: Feng Chen
Publisher:
ISBN:
Category :
Languages : en
Pages : 43
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Book Description
Assuming the clean surplus relation, the Edwards-Bell-Ohlson residual income valuation (RIV) model expresses market value of equity as the sum of the book value of equity and the expected discounted future residual incomes. Without assuming the clean surplus relation, Ohlson and Juettner-Nauroth (2000) articulate the role of forward earnings per share in valuation. We compare the implied costs of equity capital from these two approaches to earnings-based valuation within seven developed countries. We hypothesize superior performance from the RIV model in countries where the clean surplus relation holds well. First, we provide preliminary international evidence on the frequency and magnitude of the clean surplus deviations. Consistent with our hypothesis, we document superior reliability of the implied cost of equity capital derived from the RIV model when clean surplus adequately describes the firms' financial reporting. That is, the implied cost of equity capital derived from Ohlson and Juettner-Nauroth (2000) is relatively more reliable in countries where the clean surplus deviations are common. Our analyses suggest that the proper choice of earnings-based valuation model may depend on analysts' interpretation of their financial reporting environment.
Author: Feng Chen
Publisher:
ISBN:
Category :
Languages : en
Pages : 43
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Book Description
Assuming the clean surplus relation, the Edwards-Bell-Ohlson residual income valuation (RIV) model expresses market value of equity as the sum of the book value of equity and the expected discounted future residual incomes. Without assuming the clean surplus relation, Ohlson and Juettner-Nauroth (2000) articulate the role of forward earnings per share in valuation. We compare the implied costs of equity capital from these two approaches to earnings-based valuation within seven developed countries. We hypothesize superior performance from the RIV model in countries where the clean surplus relation holds well. First, we provide preliminary international evidence on the frequency and magnitude of the clean surplus deviations. Consistent with our hypothesis, we document superior reliability of the implied cost of equity capital derived from the RIV model when clean surplus adequately describes the firms' financial reporting. That is, the implied cost of equity capital derived from Ohlson and Juettner-Nauroth (2000) is relatively more reliable in countries where the clean surplus deviations are common. Our analyses suggest that the proper choice of earnings-based valuation model may depend on analysts' interpretation of their financial reporting environment.
Author: Peter Easton
Publisher: Now Publishers Inc
ISBN: 1601981945
Category : Business & Economics
Languages : en
Pages : 148
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Book Description
Estimating the Cost of Capital Implied by Market Prices and Accounting Data focuses on estimating the expected rate of return implied by market prices, summary accounting numbers, and forecasts of earnings and dividends. Estimates of the expected rate of return, often used as proxies for the cost of capital, are obtained by inverting accounting-based valuation models. The author describes accounting-based valuation models and discusses how these models have been used, and how they may be used, to obtain estimates of the cost of capital. The practical appeal of accounting-based valuation models is that they focus on the two variables that are commonly at the heart of valuations carried out by equity analysts -- forecasts of earnings and forecasts of earnings growth. The question at the core of this monograph is -- How can these forecasts be used to obtain an estimate of the cost of capital? The author examines the empirical validity of the estimates based on these forecasts and explores ways to improve these estimates. In addition, this monograph details a method for isolating the effect of any factor of interest (such as cross-listing, fraud, disclosure quality, taxes, analyst following, accounting standards, etc.) on the cost of capital. If you are interested in understanding the academic literature on accounting-based estimates of expected rate of return this monograph is for you. Estimating the Cost of Capital Implied by Market Prices and Accounting Data provides a foundation for a deeper comprehension of this literature and will give a jump start to those who have an interest in these topics. The key ideas are introduced via examples based on actual forecasts, accounting information, and market prices for listed firms, and the numerical examples are based on sound algebraic relations.
Author: Abdul H. Rahman
Publisher:
ISBN:
Category :
Languages : en
Pages : 20
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Book Description
Recently, Easton and Sommers (2006) provide evidence of a pervasive upward bias of about 3.5 per cent in implied cost of equity estimators arising from persistent optimistic analysts' forecast of earnings. Deng, Kim and Yeo (2006) derive an estimation procedure that infers the bias in earnings forecasts for different horizons and present evidence that investors, on average, adjust one-year earnings forecasts downwards by about 10 percent. In this paper, we assert that another source of bias arises from a degrees-of-freedom problem and we present a general solution to this problem by deriving an equity valuation model that incorporates a forecast horizon of T periods. We also derive an estimate of the implied cost of equity capital as the solution of a polynomial equation of degree T+1. Hence the common practice (e.g., Gode and Mohanram, 2003; Botosan and Plumlee, 2005) of adjusting the forecast horizon beyond two years and yet retain a quadratic equation implied by the Ohlson and Juettner-Nauroth model, may be incorrect. Furthermore, we show that this polynomial equation has a very interesting nested property, where any the polynomial equation of degree n is obtained as a simple algebraic transformation of the polynomial equation of degree n-1.
Author: David T. Larrabee
Publisher: John Wiley & Sons
ISBN: 1118417607
Category : Business & Economics
Languages : en
Pages : 628
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Book Description
Analysis and insights from top thought leaders on a pivotal topic in investing and asset management Valuation is the cornerstone for investment analysis, and a thorough understanding and correct application of valuation methodologies are critical for long-term investing success. Edited by two leading valuation experts from CFA Institute, this book brings together the insights and expertise of some of the most astute and successful investment minds of the past 50 years. From Benjamin Graham, the “father of value investing,” to Aswath Damodaran, you’ll learn what these investment luminaries have to say about investment valuation techniques, including earnings and cash flow analysis. Features the best thinking on valuation from the industry’s masters on the topic, supplemented with dozens of fascinating and instructive real-world examples Comprehensively discusses special valuation situations, such as real options, employee stock options, highly leveraged firms, corporate takeovers, and more Supplies you with the tools you need to successfully navigate and thrive in the ever-changing financial markets Is being produced with the full support and input of CFA Institute, the world’s leading association of investment professionals
Author: Aswath Damodaran
Publisher: Now Publishers Inc
ISBN: 1601980140
Category : Business & Economics
Languages : en
Pages : 102
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Book Description
Valuation lies at the heart of much of what we do in finance, whether it is the study of market efficiency and questions about corporate governance or the comparison of different investment decision rules in capital budgeting. In this paper, we consider the theory and evidence on valuation approaches. We begin by surveying the literature on discounted cash flow valuation models, ranging from the first mentions of the dividend discount model to value stocks to the use of excess return models in more recent years. In the second part of the paper, we examine relative valuation models and, in particular, the use of multiples and comparables in valuation and evaluate whether relative valuation models yield more or less precise estimates of value than discounted cash flow models. In the final part of the paper, we set the stage for further research in valuation by noting the estimation challenges we face as companies globalize and become exposed to risk in multiple countries.
Author: Ayman E. Haddad
Publisher:
ISBN:
Category :
Languages : en
Pages : 21
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Book Description
This study estimates the implied cost of equity capital of the Jordanian companies listed at the Amman Stock Exchange using the residual income valuation model suggested by Gebhardt, Lee, and Swaminathan (GLS) (2001). The results show that the implied cost of equity capital computed from the GLS approach produces a mean of ex-ante cost of equity capital of 9.6% for the Jordanian companies listed at the ASE. We also examine whether the Jordanian firms' cost of equity capital, based on the residual income model, is a more reliable measure of cost of equity than the realized stock returns, by investigating the association between the cost of equity capital (or realized returns) and firm-specific risk proxies. We find that the implied cost of equity capital is associated significantly with all risk proxies in the predicted directions, while the realized stock returns show a significant association only with the size of the firms and market beta. We also find that the adjusted R2 of the regression of the implied cost of equity capital on the risk proxies is higher than that of the realized stock returns. We conclude that the implied cost of equity capital derived from the residual income valuation model is a more reliable measure for the ex-ante cost of equity capital than that of the realized stock returns in terms of the association with firm-specific risk proxies.
Author: Aswath Damodaran
Publisher: John Wiley & Sons
ISBN: 0470049375
Category : Business & Economics
Languages : en
Pages : 698
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Book Description
"Aswath Damodaran is simply the best valuation teacher around. If you are interested in the theory or practice of valuation, you should have Damodaran on Valuation on your bookshelf. You can bet that I do." -- Michael J. Mauboussin, Chief Investment Strategist, Legg Mason Capital Management and author of More Than You Know: Finding Financial Wisdom in Unconventional Places In order to be a successful CEO, corporate strategist, or analyst, understanding the valuation process is a necessity. The second edition of Damodaran on Valuation stands out as the most reliable book for answering many of today?s critical valuation questions. Completely revised and updated, this edition is the ideal book on valuation for CEOs and corporate strategists. You'll gain an understanding of the vitality of today?s valuation models and develop the acumen needed for the most complex and subtle valuation scenarios you will face.
Author: Shannon P. Pratt
Publisher: John Wiley & Sons
ISBN: 1118852826
Category : Business & Economics
Languages : en
Pages : 1344
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Book Description
A one-stop shop for background and current thinking on the development and uses of rates of return on capital Completely revised for this highly anticipated fifth edition, Cost of Capital contains expanded materials on estimating the basic building blocks of the cost of equity capital, the risk-free rate, and equity risk premium. There is also discussion of the volatility created by the financial crisis in 2008, the subsequent recession and uncertain recovery, and how those events have fundamentally changed how we need to interpret the inputs to the models we use to develop these estimates. The book includes new case studies providing comprehensive discussion of cost of capital estimates for valuing a business and damages calculations for small and medium-sized businesses, cross-referenced to the chapters covering the theory and data. Addresses equity risk premium and the risk-free rate, including the impact of Federal Reserve actions Explores how to use Morningstar's Ibbotson and Duff Phelps Risk Premium Report data Discusses the global cost of capital estimation, including a new size study of European countries Cost of Capital, Fifth Edition puts an emphasis on practical application. To that end, this updated edition provides readers with exclusive access to a companion website filled with supplementary materials, allowing you to continue to learn in a hands-on fashion long after closing the book.
Author: Benedicto Kulwizira Lukanima
Publisher: Springer Nature
ISBN: 3031282671
Category : Business & Economics
Languages : en
Pages : 717
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Book Description
This book provides students with basic knowledge and advance skills for addressing practical challenges in valuation. First, the book presents financial information as a vital ingredient for performing corporate valuation. Second, the book presents key concepts of value and valuation and basic techniques for cash flow discounting. Third, the book offers an understanding of the reality of valuation, not simply as a numerical subject, as most people tend to think, but as a combination of objective and subjective aspects. Finally, it examines valuation in relation to the linkage between a firm’s objective, management role in value creation, investors’ decisions, and the valuation role of financial information. This book is designed and presented to make valuation easily accessible while also not diluting the nature of its complexity. To assist in the learning experience, the author provides illustrative case studies using real world data and review questions to cover all concepts. To assist professors, slides, Microsoft Excel illustrations, working data and sample syllabi are available online for download.
Author: David A. Holland
Publisher: John Wiley & Sons
ISBN: 1119440483
Category : Business & Economics
Languages : en
Pages : 421
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Book Description
Beyond Earnings is targeted at investors, financial professionals, and students who want to improve their ability to analyze financial statements, forecast cash flows, and ultimately value a company. The authors demonstrate that reported earnings are easily gamed by accounting shenanigans and reveal how commonly used profitability measures such as return on equity can be misleading. Because earnings and P/E ratios are too unreliable for valuation, this book takes you beyond earnings and shows you how to apply the HOLT CFROI and Economic Profit framework in a step-by-step manner. A better measure of profitability results in improved capital allocation decisions and fundamental valuations. This ground-breaking book offers the first practical in-depth discussion of how profitability and growth fade, and shows how to put this information to work right away. The authors introduce their trailblazing Fundamental Pricing Model which includes fade as an adjustable value driver and can be used to value the impact of business model disruption. As the authors explain, the key to superior stock picking is understanding the expectations embedded in a stock’s price and having a clear view of whether the company can beat those expectations. The HOLT framework has been rigorously field tested for over 40 years by global investment professionals to help them make better stock picks and by corporate managers to understand the expectations embedded in their stock price. Beyond Earnings is an indispensable guide for investors who want to improve their odds of outperforming the competition.
