A Sum&Discount Method for Appraising Firms: An Illustrative Example

Carlo Alberto Magni

Department of Economics from University of Modena and Reggio E., Faculty of Economics "Marco Biagi"

Abstract: This paper presents a new way of valuing firms and measuring residual income. The method, originally introduced in Magni (2000a, 2000b, 2000c, 2001), is here renamed lost-capital paradigm. In order to enhance comprehension the presentation relies on a very simple numerical example which shows that the new paradigm of residual income enjoys a property of abnormal earnings aggregation, according to which the NPV (and therefore the market value) of the firm does not change if each residual income changes, as long as the (uncapitalized) sum of all residual incomes do not change. While radically different from the standard residual income, the difference between the two notions is equal to the interest accrued on the past cumulated standard residual incomes, which has interesting implications for incentive compensation.

Keywords: Firm valuation, residual income; lost capital; Discount∑ Sum&Discount; incentive compensation (search for similar items in EconPapers)
JEL-codes: G11 G12 G30 G31 M2 M41 (search for similar items in EconPapers)
Pages: pages 10
Date: 2007-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: A Sum&Discount Method for Appraising Firms: An Illustrative Example (2007)
Working Paper: A Sum&Discount method for appraising firms:An illustrative example (2007)
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