Investigation of relative superiority of business valuation methods

Kay Zekany and Musa Essayyad

International Journal of Monetary Economics and Finance, 2023, vol. 16, issue 5, 417-425

Abstract: The objective of this study is to compare and contrast actual stock prices with estimated stock value using the discounted cash flow (DCF) and residual operating income (ROPI) methods to evaluate the degree of correlation of the three. This paper addresses the following two intertwined research questions: first, can the value of Fortune 1000 firms be estimated using either the discounted cash flows method or the ROPI method? and second, is one method better than the other? This study relies upon actual financial statement data and the real-time dynamics of the business operations. The results of this study offer strong evidence for the viability of both the DCF and the ROPI methods of estimating firm value. Not only are their estimates very highly correlated with each other (frequently coming to the exact same point estimate), they are also highly correlated with the actual stock price.

Keywords: business valuation; free cash flow approach; discounted cash flow model; residual operating income method; corporate finance; financial management theory; financial management applications. (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:ids:ijmefi:v:16:y:2023:i:5:p:417-425

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