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Pascal edited section_textit_DDM_textit_RIM__.tex
almost 8 years ago
Commit id: 452cad611455783aac0783b58670e8bc6475a1b9
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\section{\textit{DDM}, \textit{RIM} and the \textit{PB-ROE} approach}
$V_{t}=\displaystyle\sum_{i=1}^{K}\frac{C_{t+i}}{(1+R)^i}+V_{t+K}$
$EV_{t}=\displaystyle\sum_{i=t+1}^{t+K}\frac{FCFF_i}{(1+R)^i}+EV_{t+K}$
$P_{t}=\displaystyle\sum_{i=1}^{K}\frac{D_{t+i}}{(1+R)^i}+P_{t+K}$
$P_{t}=\displaystyle\sum_{i=1}^{\infty}\frac{D_{t+i}}{(1+R)^i}\approx\frac{D_{1}}{R-g}$
$B_{t}-B_{t-1}=E_{t}-D_{t}$
$B_{t}=E_{t}-RB_{t-1}$
This should allow to contourner caveats of earnings/dividends valuation model. We build a new Profitability/Valuation framework that hinges on the cash-flows a firm is able to generate. Using cash-flows allows to neutralize the leverage effect at the operating level of a firm as well as the balance sheet level. The paper is organized as follow. As a means of introduction we remind the basic principles behind asset valuation and show how they can be translated into equity valuation models. In the first section, we give a brief description of the links between the \textit{DDM}, the \textit{RIM} and the \textit{PB-ROE} framework. We also show how the \textit{PB-ROE} framework can be used as a screening tool for equity investors. In the second section, we show how we can build a new Profitability/Valuation framework based on a firm's cash-flows instead of a firms earnings. the deals with accounting relationship.