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Question: How does valuation in the Ohlson or Feltham-Ohlson framework differ from valuation in more traditional accounting-based frameworks?
Answer: The traditional accounting-based valuation methods predict the future from information in the current financial statements. These simple forecasts are based on the prediction that the current profitability and growth, as revealed in the financial statements, will continue in the future.
In an SF1 forecast (where SF stands for simple forecast), earnings of the next period are forecast as the closing book value for the current period multiplied by the cost of capital. Operating income is forecast by expecting the net operating assets to earn at the required return for operations. Finally, net financial expense is forecast by expecting the net financial obligations to incur the expense at the cost of net debt. This is summarised in table 1....(short extract)
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- Subject: Business and Management
- Course: Accountancy and Finance
- Level: Degree
- Year: 2nd/3rd
- Mark: 64%
- Words: 954
- Date submitted: March 21, 2009
- Date written: Not available
- References: No
- Document type: Essay*
- Essay ID: 1068
