Equity valuation

: accounting for value, anchoring and speculation

Abstract

The traditional stock valuation models, such as the Dividend Discount Model and the Discounted Cash Flow, present many limitations. According to Graham (1973), the main problem of these models lies in the incorporation of long-term growth rates, which in turn make them too speculative. Recently, Penman (2006) tried to finesse this problem, by considering a fundamentalist dictum. This fundamentalist dictum tells that one must anchor on what is known from the value of a firm, and separate it from speculation. Well, if it is to anchor on what is known, Penman (2006) claims that one shall anchor on accounting. In this context, the author describes an accrual-accounting Residual Income Model, with very specific assumptions, as the best model to address this problem. Thus, the present work provides an approach to the objection identified by Graham (1973), taking into account this perspective of Penman (2006), being summarized by the valuation of a set of firms (in this case, a sample of DAX-30 firms), based on the Residual Income Model, and an interpretation of the respective results according to the fundamentalist theory. Thereby, it is intended to find an anchor value for the shares of each sample firm and compare it with the market perceptions that are implicit in the share price. There were obtained anchor values for the shares of 22 firms from the DAX- 30, and there was a significative number of firms from the sample whose anchor share vaue (non-speculative) exceeded the market price.

Date of Award	9 Jul 2018
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Luis Pacheco (Supervisor)