AbstractsBusiness Management & Administration

Intrinsic Equity Valuation

by Christopher Lehmann

Institution: Södertörns Högskola
Year: 2016
Keywords: Equity valuation; Dividend discount model (DDM); residual income valuation (RIV) model; Abnormal earnings (AEG) model; Discounted cash flow (DCF) model; Social Sciences; Economics and Business; Business Administration; Samhällsvetenskap; Ekonomi och näringsliv; Företagsekonomi; Social and Behavioural Science, Law; samhälle/juridik; Business Studies; Företagsekonomi
Posted: 02/05/2017
Record ID: 2135363
Full text PDF: http://urn.kb.se/resolve?urn=urn:nbn:se:sh:diva-30377


The discounted cash flow model and relative valuation models are ever-increasingly prevalent in today’s investment-heavy environment. In other words, theoretically inferior models are used in practice. It is this paradox that has lead us to compare the discounted cash flow model (DCFM), discounted dividend model (DDM), residual income-based model (RIVM) and the abnormal earnings growth model (AEGM) and their relative accuracy to observed stockprices. Adding to previous research, we investigate their performance in relation to the OMX30 index. What is more, we test how the performance of each model is affected by an extension of the forecast horizon. The study finds that AEGM outperforms the other models, both before and after extending the horizon. Our analysis was conducted by looking at accuracy, spread and the inherent speculative nature of each model. Taking all this into account, RIVM outperforms the other models. In this sense, one can question the rationale behind investor’s decision to primarily use the discounted cash flow model in equity valuation.