Already have an account? Get multiple benefits of using own account!
Login in your account..!
Remember me
Don't have an account? Create your account in less than a minutes,
Forgot password? how can I recover my password now!
Enter right registered email to receive password!
Abnormal Earnings Valuation Model
Abnormal Earnings Valuation Model is a method to analyse the value of the firm. The value of the firm can be the sum of three components - the original invested capital, the normal rate of return and the abnormal return on invested capital. The equity value of the firm is given as
BV0 + S AEt/(1+r)t
where BVt = Book value of equity at beginning of year t
r = Cost of equity capital
AEt = Expected value of abnormal earnings in year t
= Projected earnings in yr t -(r * BV of equity at beginning of year t)
This model is basically a rearrangement of the DCF model. It combines "current value" on the balance sheet with the present value of future "abnormal earnings". It has a few advantages over DCF, the first being its simplicity due to the forecasting of the accounting variables. The terminal value represents only a stream of abnormal earnings beyond the forecast horizon as compared to the forecast of cash flows in the DCF model.
This method does have some shortcomings. It is dependent on the initial book value, BV0. Also, the book value fails to account for certain assets that do not generate cash flows. Things like patents, trademarks etc are not accounted for and they may cause the abnormal earnings to persist. Also, the option to back out of a project/business is not included.
If the issuer company is taken over, then the bondholders are likely to suffer. It is due to lowering of the stock prices in the market as a post takeover effect.
Q. Show the Disadvantages of adjusted discount rate? (1) The risk premium rates resolute under this method are arbitrary. Therefore this method mayn't give objective results.
Give two examples of types of companies likely to have high operating leverage.Find examples other than those cited in the chapter. Long distance electricity generating compani
Nature of Working Capital: Working Capital Management is concerned with the problems that arise in attempting to organize the Current Assets, the inter-relationship and Curren
What were the main objectives of the Bretton Woods system? Answer: The major objectives of the Bretton Woods system are to acquire exchange rate stability and promote internation
Accounting Framework - Convention of Disclosure The doctrine of disclosure suggested in which all accounting statements should be honest and to that end, full disclosure of al
Explain what will happen while the government imposes a minimum price that is below the market equilibrium price. Why is this true? The minimum price will comprise no impact on t
What does it mean when we say that the correlation coefficient for two variables is -1? What does it mean if this value were zero? What does it mean if it were +1? Correlation is
Meaning of Returns The return from holding an investment over some period - say, a year, is simply any cash payments received due to ownership, plus the change in market price,
In addition to management quality, an assessment of the financial capacity of a company should also include an evaluation of trends, regulatory environment, basic
Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!
whatsapp: +91-977-207-8620
Phone: +91-977-207-8620
Email: [email protected]
All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd