A Synthesis of Equity Valuation Techniques and the Terminal Value Calculation for the Dividend Discount Model

A Synthesis of Equity Valuation Techniques and the Terminal Value Calculation for the Dividend... This paper lays out alternative equity valuation models that involve forecasting for finite periods and shows how they are related to each other. It contrasts dividend discounting models, discounted cash flow models, and “residual income” models based on accrual accounting. It shows that some models that are apparently different yield the same valuation. It gives the general form of the terminal value calculation in these models and shows how this calculation serves to correct errors in the model. It also shows that all models can be interpreted as providing a particular specification of the terminal value for the dividend discount model. In so doing it shows how one calculates the terminal value for the dividend discount formula. The calculation involves weighting forecasted stocks and flows of value with weights determined by a parameter that can be discovered from pro forma analysis. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

A Synthesis of Equity Valuation Techniques and the Terminal Value Calculation for the Dividend Discount Model

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 1998 by Kluwer Academic Publishers
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1023/A:1023688704798
Publisher site
See Article on Publisher Site

Abstract

This paper lays out alternative equity valuation models that involve forecasting for finite periods and shows how they are related to each other. It contrasts dividend discounting models, discounted cash flow models, and “residual income” models based on accrual accounting. It shows that some models that are apparently different yield the same valuation. It gives the general form of the terminal value calculation in these models and shows how this calculation serves to correct errors in the model. It also shows that all models can be interpreted as providing a particular specification of the terminal value for the dividend discount model. In so doing it shows how one calculates the terminal value for the dividend discount formula. The calculation involves weighting forecasted stocks and flows of value with weights determined by a parameter that can be discovered from pro forma analysis.

Journal

Review of Accounting StudiesSpringer Journals

Published: Jan 13, 2005

References

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