Valuation Techniques: Discounted Cash Flow, Earnings Quality, Measures of Value Added, and Real Options

NOTES

1. Sanjeev Bhojraj and Charles M.C. Lee, “Who Is My Peer? A Valuation-Based Approach to the Selection of Comparable Firms,” Journal of Accounting Research (May 2002):407–439.

2. Based on data from Tom Copeland, Tim Koller, and Jack Murrin, Valuation: Measuring and Managing the Value of Companies, 2nd ed. (New York: John Wiley & Sons, 1996).

3. For further information on the Gordon constant-dividend-growth model, see Myron J. Gordon, “The Savings, Investment and Valuation of a Corporation,” Review of Economics and Statistics (February 1962):37–49.

4. Richard Frankel and Charles M.C. Lee, “Accounting Valuation, Market Expectation, and Cross-Sectional Stock Returns,” Journal of Accounting and Economics (June 1998):283–319; Stephen H. Penman and Theodore Sougiannis, “A Comparison of Dividend, Cash Flow, and Earnings Approaches to Equity Valuation,” Contemporary Accounting Research (Fall 1998):343–383.

5. Edgar O. Edwards and Philip W. Bell, The Theory and Measurement of Business Income (Berkeley, CA: University of California Press, 1961); James A. Ohlson, “Earnings, Book Values, and Dividends in Security Valuation,” Contemporary Accounting Research (Spring 1995):661–687.

6. The clean-surplus relation is the assumption that changes in book value are completely captured by earnings or net dividends. In other words, Bt+1 = Bt + NIt+1 − DIVt+1.

7. Jing Liu, Doron Nissim, and Jacob Thomas, “Equity Valuation Using Multiples,” Working Paper, UCLA and Columbia University, December 1999. ...