Advanced Search
MyIDEAS: Login to save this paper or follow this series

Terminal Value Techniques in Equity Valuation - Implications of the Steady State Assumption

Contents:

Author Info

  • Levin, Joakim

    (Dept. of Business Administration, Stockholm School of Economics)

  • Olsson, Per M.

    ()
    (School of Business, University of Wisconsin-Madison)

Registered author(s):

    Abstract

    This paper examines the conditions necessary for calculating steady state terminal values in equity (company) valuation models. We make explicit use of the fact that a company's income statements and balance sheets can be modeled as a system of difference equations. From these difference equations, we derive conditions for steady state. The conditions ensure that the company remains qualitatively similar year by year after the valuation horizon and that it has a stable development of earnings, free cash flows, dividends and residual income. We show how steady state condition violations cause internal inconsistencies in valuation models and how this can have a substantial impact on the value estimates. Steady state is further a necessary condition for a free cash flow valuation, a dividend valuation and a residual income valuation to yield identical results when terminal values are used. The parameters of the model are common accounting and control concepts, and the derived conditions have accounting meaning, linking stock variables in the balance sheet with the flow variables in (and related to) the income statement.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://swoba.hhs.se/hastba/papers/hastba2000_007.pdf
    Download Restriction: no

    File URL: http://swoba.hhs.se/hastba/papers/hastba2000_007.pdf.zip
    Download Restriction: no

    File URL: http://swoba.hhs.se/hastba/papers/hastba2000_007.ps
    Download Restriction: no

    File URL: http://swoba.hhs.se/hastba/papers/hastba2000_007.ps.zip
    Download Restriction: no

    Bibliographic Info

    Paper provided by Stockholm School of Economics in its series Working Paper Series in Business Administration with number 2000:7.

    as in new window
    Length: 26 pages
    Date of creation: 30 Jun 2000
    Date of revision:
    Handle: RePEc:hhb:hastba:2000_007

    Contact details of provider:
    Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, SE 113 83 Stockholm, Sweden
    Phone: +46-(0)8-736 90 00
    Fax: +46-(0)8-31 01 57
    Email:
    Web page: http://www.hhs.se/
    More information through EDIRC

    Related research

    Keywords: equity valuation; terminal value; financial statement analysis;

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:hhb:hastba:2000_007. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Helena Lundin).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.