{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

09Class15

# 09Class15 - The Substitution Solving for Dt we get Dt = CIt...

This preview shows pages 1–6. Sign up to view the full content.

1 Solving for D t we get: D t = CI t + BV t-1 -BV t Substituting for D t we get V = (CI 1 + BV 0 – BV 1 )/(1+r) + (CI 2 + BV 1 – BV 2 )/(1+r) 2 + …. The Substitution

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
2 BV 0 /(1+r) = BV 0 – rBV 0 /(1+r) And for all t > 0, -BV t /(1+r) t +BV t /(1+r) t+1 = -rBV t /(1+r) t+1 Two Further Substitutions
3 V = BV 0 + (CI 1 – rBV 0 )/(1+r) + (CI 2 – rBV 1 )/(1+r) 2 + … The terms CI t – rBV t-1 have an interesting economic interpretation. The Residual Income Valuation Model

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
4 The term CI t – rBV t-1 has been called: residual income, economic value added, economic profit and abnormal profit. Thus the Residual Income Valuation model says that the value of common stock equals its book value plus the present value of future residual income. Business Week article Earnings Per Share? Phooey!: A successful money manager says “ EPS is just an accounting number, when the real key to stock price is economic profit.” Interpretation of CI - rBV
5 In the fall of 2007 an article in the Financial Times said the Shanghai index was overpriced. It based this on two facts in combination. 1. The average market to book ratio for stocks in the index is high --- nearly 5. 2.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 16

09Class15 - The Substitution Solving for Dt we get Dt = CIt...

This preview shows document pages 1 - 6. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online