A Sum&Discount Method for Appraising Firms: An Illustrative Example
AbstractThis paper presents a new way of valuing firms and measuring residual income. The method, originally introduced in Magni (2000a, 2000b, 2000c, 2001), is here renamed lost-capital paradigm. In order to enhance comprehension the presentation relies on a very simple numerical example which shows that the new paradigm of residual income enjoys a property of abnormal earnings aggregation, according to which the NPV (and therefore the market value) of the firm does not change if each residual income changes, as long as the (uncapitalized) sum of all residual incomes do not change. While radically different from the standard residual income, the difference between the two notions is equal to the interest accrued on the past cumulated standard residual incomes, which has interesting implications for incentive compensation.
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Bibliographic InfoPaper provided by University of Modena and Reggio E., Faculty of Economics "Marco Biagi" in its series Department of Economics with number 572.
Length: pages 10
Date of creation: Nov 2007
Date of revision:
Firm valuation; residual income; lost capital; Discount∑ Sum&Discount; incentive compensation;
Other versions of this item:
- Carlo Alberto Magni, 2007. "A Sum&Discount Method for Appraising Firms: An Illustrative Example," Department of Economics 0572, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
- Magni, Carlo Alberto, 2007. "A Sum&Discount method for appraising firms:An illustrative example," MPRA Paper 6114, University Library of Munich, Germany.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- M2 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
This paper has been announced in the following NEP Reports:
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- Magni, Carlo Alberto, 2001. "Valore Aggiunto Sistemico: un'alternativa all'EVA quale indice di sovraprofitto periodale," MPRA Paper 7525, University Library of Munich, Germany.
- Roberto Ghiselli Ricci & Carlo Alberto Magni, 2009.
"Economic value added and systemic value added: symmetry, aditive coherence and differences in performance,"
PROYECCIONES FINANCIERAS Y VALORACION
005736, MASTER CONSULTORES.
- Roberto Ghiselli Ricci & Carlo Alberto Magni, 2006. "Economic value added and systemic value added: symmetry, additive coherence and differences in performance," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 2(3), pages 151-154, May.
- Magni, Carlo Alberto, 2005. "On decomposing net final values: EVA, SVA, and shadow project," MPRA Paper 12357, University Library of Munich, Germany.
- Carlo Alberto Magni, 2009.
"Opportunity Cost, Excess Profit, and Counterfactual Conditionals,"
Frontiers in Finance and Economics,
SKEMA Business School, vol. 6(1), pages 118-154, April.
- Magni, Carlo Alberto, 2003. "Opportunity cost, excess profit, and counterfactual conditionals," MPRA Paper 5695, University Library of Munich, Germany.
- Carlo Alberto Magni, 2006.
"Zelig and the Art of Measuring Excess Profit,"
Frontiers in Finance and Economics,
SKEMA Business School, vol. 3(1), pages 103-129, June.
- Magni, Carlo Alberto, 2004.
"Modelling excess profit,"
Elsevier, vol. 21(3), pages 595-617, May.
- Magni, Carlo Alberto, 2000. "Systemic Value Added, Residual Income and Decomposition of a Cash Flow Stream," MPRA Paper 5900, University Library of Munich, Germany.
- Carlo Magni, 2005. "On Decomposing Net Final Values: Eva, Sva and Shadow Project," Theory and Decision, Springer, vol. 59(1), pages 51-95, 08.
- Magni, Carlo Alberto, 2000. "Decomposition of a Certain Cash Flow Stream: Differential Systemic Value and Net Final Value," MPRA Paper 7308, University Library of Munich, Germany.
- Carlo Alberto Magni, 2003. "Decomposition of Net Final Values: Systemic Value Added and Residual Income," Bulletin of Economic Research, Wiley Blackwell, vol. 55(2), pages 149-176, 04.
- Magni, Carlo Alberto, 2007. "Measuring performance and valuing firms: In search of the lost capital," MPRA Paper 5850, University Library of Munich, Germany.
- Carlo Alberto, Magni, 2008.
"Splitting Up Value: A Critical Review of Residual Income Theories,"
10506, University Library of Munich, Germany.
- Magni, Carlo Alberto, 2009. "Splitting up value: A critical review of residual income theories," European Journal of Operational Research, Elsevier, vol. 198(1), pages 1-22, October.
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