Reconciling value estimates from the discounted cash flow model and the residual income model

Lundholm, R. J. and O'Keefe, T. B. (2001) Reconciling value estimates from the discounted cash flow model and the residual income model. Contemporary Accounting Research, 18 2: 311-335.


Author Lundholm, R. J.
O'Keefe, T. B.
Title Reconciling value estimates from the discounted cash flow model and the residual income model
Journal name Contemporary Accounting Research   Check publisher's open access policy
ISSN 0823-9150
1911-3846
Publication date 2001
Sub-type Article (original research)
Volume 18
Issue 2
Start page 311
End page 335
Total pages 25
Place of publication Toronto
Publisher Canadian Academic Accounting Association
Collection year 2002
Language eng
fre
Subject CX
350101 Financial Accounting
710401 Finance and investment services
1503 Business and Management
Abstract This paper examines why practitioners and researchers get different estimates of equity value when they use a discounted cash flow (CF) model versus a residual income (RI) model. Both models are derived from the same underlying assumption -- that price is the present value of expected future net dividends discounted at the cost of equity capital -- but in practice and in research they frequently yield different estimates. We argue that the research literature devoted to comparing the accuracy of these two models is misguided; properly implemented, both models yield identical valuations for all firms in all years. We identify how prior research has applied inconsistent assumptions to the two models and show how these seemingly small errors cause surprisingly large differences in the value estimates. [ABSTRACT FROM AUTHOR]
Keyword Discounted cash flow
Residual income
Valuation
Q-Index Code CX

Document type: Journal Article
Sub-type: Article (original research)
Collection: UQ Business School Publications
 
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Created: Tue, 14 Aug 2007, 17:04:44 EST