Abstract
A survey discussing fundamental conceptual issues in valuation. Topics include differences in fundamental valuation, comparative valuation, and replacement-value based valuation; accounting approaches to valuation such as residual income as contrasted with discounted cash flows; the use of valuation ratios based on earnings, dividends, and return on investment; the roles of different types of real capital in valuation depending on whether capital is tangible, intangible, or working capital; and the use of stochastic discount factors in valuation. Various pitfalls leading to common mistakes in valuation are discussed. In addition several applications are presented.
Valuation Insight
The survey provides insight into a series of common errors in valuation. These include the inconsistent application of inflation corrections; the impact of predictability in asset prices; the inappropriate adjustment for leverage; incorrect treatment of default risk; insufficient application of the yield curve to account for cash flow duration; and the improper usage of earnings for valuation purposes.