Hashem Nikoomaram; Roya Darabi
Volume 7, Issue 25 , July 2007, , Pages 279-316
Abstract
This paper develops an equity valuation model that relates growth in expected earnings to firm value. The modelling, in addition to growth, also incorporates nonrecurring items as an adjustment for earnings. The analysis shows that the valuation function consists of three terms: (i) "Permanent earnings ...
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This paper develops an equity valuation model that relates growth in expected earnings to firm value. The modelling, in addition to growth, also incorporates nonrecurring items as an adjustment for earnings. The analysis shows that the valuation function consists of three terms: (i) "Permanent earnings model" (i.e., capitalized earnings) adjusted for non-recurring items, (ii) Current non-recurring items and, (iii) a "Multiplier" that mirrors both short-term growth and long-term growth, which multiplies next period expected earnings. This modelling implies that the accounting is conservative, indicating that growth and conservative accounting are two sides of the same coin. The paper also shows that like dividends, non-recurring items are irrelevant for the purposes of forecasting and valuation, except via their impact on book value. Permanent earnings, expected earnings, expected abnormal earnings, short-term growth, long-term growth, cost of capital and expected dividend had selected to the variable of this research. All of the hypothesis are tested by Wilcox on signed rank test .The result of this research indicates that all of the three models between calculative firm value and market firm value are found to lack significance deference.
