Capital market valuation
The residual earning valuation model normally uses the book value as the anchor and sum of the present value of the residual earnings. The REVM is advantageous over other valuation models as it focus on value drivers and use the accrual accounting (Gup & Thomas 2010). That means that it matches value added with the value given up. It recognizes capital expenditure and other forms of investing as an asset instead of outflow. REVM try to compensate value added omitted from the discounted cash flow model through matching the value added items with the value given up. The abnormal earnings growth is the cum-dividend earnings less the normal earnings. AEGM usually focus on earnings and earning growths and not the cash flows unlike in discounted cash flow model. Similar to REVM, AEGM use the accrual accounting where sales match with expenses. Thus, it usually matches value creation with the value given up.
The Abnormal earning growth model usually protects the investors from having to pay too much for growth. A major difference between AEGM and REVM is that AEGM tend to depend heavily on the required return and growth assumption (Gup & Thomas 2010). However, REVM usually depends partially on the growth assumption and the book value. Similarly, REVM tends to offer more information on the value drivers, and the AEGM does not entail that information. A major difference between the REVM and AEGM is that REVM usually use the value as the anchor and later charges earnings by the required return applied to the book value. On the other hand, AEGM tends to start with capitalized earnings and then it charges cum-dividend earnings by the normal earnings.
Gup, B & Thomas, R (2010). The valuation Handbook John Wiley & Son
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