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Advanced Valuation Skills - Equivalence of income models

Essentially, all methods and models should deliver the same value provided that we have made consistent assumptions. Precisely consistent assumptions are virtually impossible to make across valuation methods (cost, income and market), and are even difficult to make between one multiple to another.

However, it is possible to emulate consistency over income models, and in this module we provide proof that the models are numerically equivalent, if precisely consistent assumptions are made. From the example workbook, we develop insights into the differences between the default assumptions of each model, and when each model will be likely to produce the most robust results.

The models which we reconcile are:

  • Free cash flows to the firm (FCFF)
  • Free cash flows to equity (FCFE)
  • Adjusted present value (APV)
  • Multi-period excess earnings (MEEM)
  • Dividend discount model (DDM)

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