Valuation of shares based on residual income models
The difference between the book value and market value of shares and residual income. Another technology for valuing shares based on the time value of money is based on the difference between their book value and market value. The stock value of the (ВУ) stock will be called the equity of the company per simple share, the market value - respectively, the stock quotation on the market.
Imagine that all elements of the company's capital (ie not only money, but also reserves, machinery, equipment, intangible assets, etc.) are reflected in the balance sheet according to objective market valuation. Let such an assessment reflect the obligations. Then if such a company does not have competitive advantages compared to other similar enterprises, its market valuation should coincide with the balance sheet, and the ratio R/V (the ratio of the market price of the stock to the balance sheet) must be equal to one.
However, if this coefficient is still greater than one, it means that the company has future growth prospects and it will be able to create an abnormal earnings per share based on its competitive advantages compared to others. If one imagines that the net profit shown in the company's balance sheet reflects its actual financial results, this anomalous earnings per share should obviously look like this:
The decrease in this formula is the actual income (profit) per share, and the deductible is the income that any other company in the industry having the same level of risk (and, correspondingly, an average return of k). The value RI is called residual income.
RIM is a residual income method. If this logic is correct, the market value of any stock can be expressed as the sum of its book value BV0 at the time of valuation plus the sum of the given value RI for the entire period of competitive advantage N:
Let's show this in an example.
Example . Suppose there is a company that generates a profit per share of 20 rubles. with a balance sheet value of VU0 = = 100 rubles, which is higher per unit of invested capital than the market offers (the return on alternative investments is 15%). However, after four years, its competitive advantages will cease to exist, and the company will generate revenue at the market rate. By this time, the share price will be equal to the book value and the coefficient P/B will be equal to 1. Dividends paid by the company within the next five years will be equal to 10 rubles. per share. We calculate the main indicators (Table 2.3).
TABLE 2.3. Forecast of residual income
We estimate the share based on the discounting model of dividends:
The same is obtained using the RIM method:
Advantages of the RIM method. The merit of this method is usually that the calculation is based not on the expected dividends, but on accounting estimates that are easier to obtain. Dividends are difficult to predict, moreover, they may not exist during the forecast period. If, for example, a company does not pay dividends for a long time, the result of its evaluation by the method of cash (dividend) flows will depend on the terminal value of the company at the end of the forecast period. And since it is calculated approximately, the result of the calculation can be very inaccurate. The calculation using the RIM method starts from the balance sheet of the property, and later adjusts it, so this technology from the very first period provides an objective basis for the company's valuation, and the calculation results are less dependent on distant forecasts.
Disadvantages of the RIM method. At the same time, accounting profit is not a cash flow, and no matter how we correct the credentials, they still remain conditional and historical in nature. EPS
Therefore, when comparing the accounting return ROE = ^ -: - BV and the market yield required - k , of course, allow large inaccuracies in calculations.
Even more cautious is the use of modifications of this approach to the motivation of top managers and the management of the company's value. Estimation of the company with some degree of conventionality based on the residual income (RI, EVA , etc.) does not mean that, by stimulating their increase, we increase the value of the company. These indicators are flat and single-period, so their increase in one period may well cause damage in the following.
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