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.
Review of Accounting Studies – Springer Journals
Published: Jan 13, 2005
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