The abnormal earnings valuation model is a method for determining a company's worth that is based on book value and earnings. Also known as the residual income model, it looks at whether management's decisions cause a company to perform better or worse than anticipated. The model says that investors should pay more than book value if earnings are higher than expected and less than book value if earnings are lower than expected

There are numerous other methods for valuing companies, including P/E ratio, price-to-book value ratio, return on equity, return on capital employed and discounted cash flow. Investors and analysts should not place too much emphasis on any one of these (or a number of other) measures of value because no single method can provide a complete picture of a company's financial performance.

meridian.allenpress.com [PDF]

… where the probability function f determines expected dividends and the covariance between dividends and the valuation index … one obtains a formula expressing value as equal to book value plus the present value of risk-adjusted expected abnormal earnings, given some …

link.springer.com [PDF]

… where the probability function f determines expected dividends and the covariance between dividends and the valuation index … one obtains a formula expressing value as equal to book value plus the present value of risk-adjusted expected abnormal earnings, given some …

meridian.allenpress.com [PDF]

… where the probability function f determines expected dividends and the covariance between dividends and the valuation index … one obtains a formula expressing value as equal to book value plus the present value of risk-adjusted expected abnormal earnings, given some …

www.jstor.org [PDF]

… where the probability function f determines expected dividends and the covariance between dividends and the valuation index … one obtains a formula expressing value as equal to book value plus the present value of risk-adjusted expected abnormal earnings, given some …

www.emerald.com [PDF]

… where the probability function f determines expected dividends and the covariance between dividends and the valuation index … one obtains a formula expressing value as equal to book value plus the present value of risk-adjusted expected abnormal earnings, given some …

www.sciencedirect.com [PDF]

… where the probability function f determines expected dividends and the covariance between dividends and the valuation index … one obtains a formula expressing value as equal to book value plus the present value of risk-adjusted expected abnormal earnings, given some …

www.tandfonline.com [PDF]

… where the probability function f determines expected dividends and the covariance between dividends and the valuation index … one obtains a formula expressing value as equal to book value plus the present value of risk-adjusted expected abnormal earnings, given some …

www.sciencedirect.com [PDF]

… where the probability function f determines expected dividends and the covariance between dividends and the valuation index … one obtains a formula expressing value as equal to book value plus the present value of risk-adjusted expected abnormal earnings, given some …

www.emerald.com [PDF]

… where the probability function f determines expected dividends and the covariance between dividends and the valuation index … one obtains a formula expressing value as equal to book value plus the present value of risk-adjusted expected abnormal earnings, given some …

onlinelibrary.wiley.com [PDF]

… where the probability function f determines expected dividends and the covariance between dividends and the valuation index … one obtains a formula expressing value as equal to book value plus the present value of risk-adjusted expected abnormal earnings, given some …

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Examples include companies with an unsustainable competitive advantage, such as a patent on a product that has not yet expired; companies with very high growth rates in sales, profits, or cash flow; and companies whose prices have been depressed by industry-wide problems.

It says that investors should pay more than book value if earnings are higher than expected and less than book value if earnings are lower than expected.

The concept of abnormal earnings came from Ben Graham and David Dodd's book Security Analysis in 1934.

Abnormal Earnings Valuation Model.

There are numerous other methods for valuing companies, including PE ratio, price-to-book value ratio, return on equity, return on capital employed and discounted cash flow.

Because no single method can provide a complete picture of a company's financial performance.

The Abnormal Earnings Valuation Model is a method for determining a company's worth that is based on book value and earnings.

## 48 replies on “Abnormal Earnings Valuation Model”

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