Recently, the residual income (RI) model has become very popular in valuation because it purports to measure quot;value addedquot; by explicitly taking into account the cost for capital in the income statement. Some proponents of the residual income approach have even suggested that the RI model...

In the financial appraisal of a project, the cashflow statements are constructed from two points of view: the Total Investment (TI) Point of View and the Equity Point of View. One of the most important issues is the estimation of the correct financial discount rates for the two points of view....

There are two ways to define the present value of the tax shield (PVTS). First, the (present) value of the tax shield VTS is simply the tax shield, discounted by y, which is the appropriate discount rate for the tax shield. Second, the (present) value of the tax shield VTS is the difference in...

There are two ways to view the inter-temporal risk profile of a finite stream of cash flows that is represented by a binomial process. We can examine the risk profile of the cash flow process or the value process that is derived from the cash flow process. First, with respect to a given year n,...

If the forecast period is short, then the specification of the assumption for the calculation of the terminal may be an important element of the valuation exercise. To be specific, with respect to the reference year 0, the (present) value of the terminal value may be more than fifty percent of...

In a recent paper, Ruback (2000) assumes that the discount rate for the tax shield in the Adjusted Present Value (APV) approach is the cost of debt and shows that the Capital Cash Flow (CCF) method and the Adjusted Present Value (APV) approach give different answers for the levered value. In...

Unquestionably, before the advent of the personal computer, modeling the impacts of inflation in investment appraisal was an enormous task. Currently, with the widespread availability of personal computers, conducting investment appraisal by constructing financial statements with nominal prices...

Using no-arbitrage arguments in an M amp; M world, we show that in the N-period case, the appropriate discount rate for the tax shield is rho, the return to unlevered equity. We make no assumption about the appropriate discount rate for the tax shield. Instead, the appropriate discount rate for...

This paper presents a critical review of the conceptual issues involved in accounting for financial risk in project appraisal. It begins by examining three of the main approaches to assessing risk: the use of the probability distributions of project outcomes, such as the NPV, the use of a single...

Researchers continue to quot;horse racequot; the Residual Income (RI) model and the Cash Flow (CF) model, with no regard for the underlying assumptions. Recently, Lundholm and O'Keefe (2000) asserted that they have identified an important reason for the discrepancy between the results obtained...