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File Format | PDF
File Size | 1.0 MB
Pages | 68
Language | English
Category | Forex
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Description: Standard
formulas for valuing equities require prediction of payoffs "to
infinity" for going concerns but a practical analysis requires that they
be predicted over finite horizons. This truncation inevitably involves (often
troublesome) "terminal value" calculations. This paper contrasts
dividend discount techniques, discounted cash flow analysis, and techniques
based on accrual earnings when applied to a finite-horizon valuation.
Valuations based
on average ex post payoffsover various horizons, with and without terminal
value calculations, are compared with (ex ante) market prices to give an
indication of the error introduced by each technique in truncating the horizon.
Comparisons of these errors show that accrual earnings techniques dominate free
cash flow and dividend discounting approaches.
Further, the
relevant accounting features of each technique are identified and the sources
of the accounting that makes it less than ideal for finite horizon analysis
(and for which it requires a correction) are discovered. Conditions where a
given technique requires particularly long forecasting horizons are identified
and the performance of the alternative techniques under those conditions is
examined.
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A Comparison Of Dividend Cash Flow And Earnings Approaches To Equity Valuation
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