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Author: | Cassia, L. Vismara, S. |
Title: | Valuation accuracy and infinity horizon forecast: Empirical evidence from Europe |
Journal: | Journal of international financial management & accounting
2009 : SUMMER, VOL. 20:2, p. 135-165 |
Index terms: | accounting cost accounting valuation forecasting markets prices growth Europe |
Language: | eng |
Abstract: | This paper's focus is on the assumptions of infinite-horizon forecasting in the field of firm valuation. It is argued that the equivalence btw. cash accounting (here as: acc-g.) and accrual acc-g. is the way of verifying the steady state (here as: s-s.) assumption, defined as the state when a firm earns exactly its cost of capital (as: c-of-c.). It is derived that the "ideal" growth rate to use in s-s. is equal to the reinvestment rate times Weighted average c-of-c. A sample of over 780 analyst valuations is collected and compared how the implied target prices (as: t-prcs.) deviate from what the t-prcs. would have been using the "ideal" s-s. growth rates. It is found that the deviation has predictive value over the probability that actual market price reaches the t-prc. over the following 12-month period etc. |
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