Abnormal Earnings Valuation Model

It is the method of evaluating a corporation, firm, company or a business entity on the basis of book value and the earnings of the entity. This is the method of finding the worth of a company according to its book value and basic earnings. The other name given to the abnormal earnings evaluation is the residual income modal. The major objective of this model is to find out whether the company has performed worse or better than anticipated in a given accounting period. The performance of the company in a given accounting period shows that whether the management decision regarding the business activities of the company were right or wrong. The model also gives a paying methodology to the investors of the company. The model states that the investor of the company should pay more if the book value or the earnings of the company are higher than anticipated however on the other hand the investor has to pay less if the earnings or the book value of the company is lower than anticipated.

Although abnormal earnings valuation method is a method of evaluating a company there are number of other methods that are being used to evaluate the companies such as P/E Ratio method, price to book value ratio method, return on equity method, return on capital employed method and discounted cash flow method. However investor should not rely solely on these method as none of these methods provide a complete picture of the financial statement of the company.

 

 

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