Combining Earnings and Book Value in Equity Valuation *

Combining Earnings and Book Value in Equity Valuation * It is common to apply multipliers to both earnings and book value to calculate approximate equity values. However, applying a price‐earnings multiplier or a price‐to‐book multiplier typically produces two valuations and the analyst is left with the question of how to combine them into one valuation. This paper calculates weights that combine the valuations and shows that these weights vary over the difference between earnings and book value, doing so systematically over time. When earnings are small compared to book value, the weights are different from when earnings are large relative to book value, and they vary in a nonlinear way over the difference between the two. The weights also combine forecasts of future earnings, based on earnings and book value separately, into one composite forecast. The paper calculates a second set of weights to ascertain how the two numbers are combined to forecast one‐year‐ahead earnings and three‐years‐ahead earnings. The calculated weights are applied out of sample to ascertain their predictive ability against other benchmarks. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Contemporary Accounting Research Wiley

Combining Earnings and Book Value in Equity Valuation *

Contemporary Accounting Research, Volume 15 (3) – Sep 1, 1998

Loading next page...
 
/lp/wiley/combining-earnings-and-book-value-in-equity-valuation-W6KNxfrO0n
Publisher
Wiley
Copyright
1998 Canadian Academic Accounting Association
ISSN
0823-9150
eISSN
1911-3846
DOI
10.1111/j.1911-3846.1998.tb00562.x
Publisher site
See Article on Publisher Site

Abstract

It is common to apply multipliers to both earnings and book value to calculate approximate equity values. However, applying a price‐earnings multiplier or a price‐to‐book multiplier typically produces two valuations and the analyst is left with the question of how to combine them into one valuation. This paper calculates weights that combine the valuations and shows that these weights vary over the difference between earnings and book value, doing so systematically over time. When earnings are small compared to book value, the weights are different from when earnings are large relative to book value, and they vary in a nonlinear way over the difference between the two. The weights also combine forecasts of future earnings, based on earnings and book value separately, into one composite forecast. The paper calculates a second set of weights to ascertain how the two numbers are combined to forecast one‐year‐ahead earnings and three‐years‐ahead earnings. The calculated weights are applied out of sample to ascertain their predictive ability against other benchmarks.

Journal

Contemporary Accounting ResearchWiley

Published: Sep 1, 1998

References

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Search

Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly

Organize

Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.

Access

Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve

Freelancer

DeepDyve

Pro

Price

FREE

$49/month
$360/year

Save searches from
Google Scholar,
PubMed

Create folders to
organize your research

Export folders, citations

Read DeepDyve articles

Abstract access only

Unlimited access to over
18 million full-text articles

Print

20 pages / month

PDF Discount

20% off