Open Access Peer-reviewed

Equity Valuation Approach Based on Accounting Variables

Thanakornn Phansawadhi
Faculty of Engineering, Khon Kaen University, Khon Kaen, Thailand
Journal of Finance and Economics. 2013, 1(3), 41-48. DOI: 10.12691/jfe-1-3-3
Published online: August 25, 2017

Abstract

This academic paper proposed theoretically the alternative estimate of the cost of equity capital (COE) for accounting-based residual income model (RIM), which this quantity becomes an important variable for the intrinsic worth valuation model. Its format can be express interchangeably in many forms of accounting variables combining with some financial ratio. The basic assumption is relying on that the quantity of COE for an asset should reflect from its profitability and change in market price during given periods. By taking reverse-calculation into the particular RIM equation, these outcomes (alternative COE estimates) are consistent according with the fact that the investors reasonably expect to earn from investing in shares of a firm through both or either total dividends and prospective increment in market capitalization. The proposition can be eliminating the lacked explanation of existing estimates and also explainable why investors are still investing in shares of a firm that has no dividend policy. While traditional estimation methods default the explanation of this truth.

Keywords:

cost of equity capital, discount rate, equity valuation, intrinsic worth valuation approach
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