Compare and contrast the valuation of stocks using the residual income valuation model and the abnormal...

Compare and contrast the valuation of stocks using the residual income valuation model and the abnormal earnings growth model

Solutions

Expert Solution

It is an equity valuation method that the value of a company’s stock equals the present value of future residual incomes discounted at the appropriate cost of equity.

residual income approach, a company’s stock value can be calculated as sum total of its book value and its expected future residual income’s present value which is discounted at cost of equity, r.

Residual income = Net income - equity capital × cost of equity

The abnormal earnings valuation method basically helps the investor to determine the potential fair value of a stock

The discounting factor used should be the return required on equity rather than the weighted average cost of capital. If the second half of the formula is positive, it means that the management is creating value by delivering higher than expected returns for the shareholders.

Value of the Stock = Book Value + Perpetual Value of Future Expected Residual Incomes

under residual income model the opportunity cost will be included where as in abnormal earnings model doesn't include the factors dependence on receipt your income is more than that of abnormal earnings model

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

List and explain the Ohlson’s clean surplus formula and OJ residual income valuation model.

Outline the definitions of abnormal behavior discussed and compare and contrast these definitions in terms of...

Outline the definitions of abnormal behavior discussed and compare and contrast these definitions in terms of their strengths and weaknesses. What definition of “abnormal behavior” do you think best captures the construct? Defend your answer. Using your preferred definition, how would you have labeled the activities portrayed in the “monkey brains”? use any of the other video clips shown in class to characterize the DSM 5 definition of what is considered to be a psychological disorder.

Explain and contrast return on investment and residual income. Provide examples.

Compare and contrast valuation models based on discounted cash flows and valuation approaches based on the...

Compare and contrast valuation models based on discounted cash flows and valuation approaches based on the relevant multiples of comparable investments.

Compare and contrast the economic model to the voluntary spirit model.

You value a company using the discounted free cash flow model and the residual operating income...

You value a company using the discounted free cash flow model and the residual operating income model. You are surprised that the valuations are different. Which of the following could be the cause? A. Your forecast horizon is too short B. You have assumed that weighted-average cost of capital (WACC) will be constant in the future C. You have forecasted that the company’s leverage will stay constant D. You have forecasted sales growth to converge to the long-run economic growth...

compare and contrast inventory valuation methods and the impact of each on the financial reporting of...

compare and contrast inventory valuation methods and the impact of each on the financial reporting of the organization?

Compare and contrast a sticky dividend policy with a residual dividend policy. Which policy is more...

Compare and contrast a sticky dividend policy with a residual dividend policy. Which policy is more widely used by large corporations? What advantages does that policy have over the other?

1) Compare and contrast a sticky dividend policy with a residual dividend policy. Which policy is...

1) Compare and contrast a sticky dividend policy with a residual dividend policy. Which policy is more widely used by large corporations? What advantages does that policy have over the other? 2) The dividend payout ratio equals dividends paid divided by earnings. How would you expect this ratio to behave during a recession? What about during an economic boom? 3) Tang Mine has 100,000 shares outstanding and just declared a 2-for-1 stock split. Before the announcement, the firm's shares were...

Compare and contrast using 2 two model organisms: a) the major signaling pathways, mechanisms and roles...

Compare and contrast using 2 two model organisms: a) the major signaling pathways, mechanisms and roles of genes that give rise to left-right asymmetry in vertebrates.b) Describe how some major organs are affected by L-R asymmetry in both your model organisms?

Subjects