A Tutorial on Residual Income Valuation and Value Added Valuation

Two valuation models based on accounting concepts and measurements are specified and discussed in the paper - a "residual income valuation" model and a "value added valuation" model. Given clean surplus accounting, the first model is identical to a model where future expected dividends and a horizon value of owners' equity are discounted to a present value. Similarly, the second model is identical to a free cash flow valuation framework, as specified in the well-known "McKinsey model" (Copeland, Koller & Murrin, 1994). The valuation models being specified in the paper use accounting measures of capital, capital growth and return on capital to calculate a fundamental value of owners' equity. As a certain connection between the required market rate of return ("cost of capital"), the accounting return on capital and capital growth can be expected to hold in the long run, the valuation models provide for some simplification of typical prediction problems inherent in fundamental valuation analysis.Conservative accounting; economic value added; financial ratios; fundamental analysis; residual income; valuation

Probabilistic Business Failure Prediction in Discounted Cash Flow Bond and Equity Valuation

The purpose of the paper is to incorporate probabilistic business failure predictions in discounted cash flow (DCF) models for the valuation of company bonds and owners´ equity. The analysis shows that period-specific probabilities of business failure are instrumental to the assessment of expected values of cash flows in such models. Under somewhat restrictive conditions the failure risk can alternatively be accommodated through an adjustment of the discount rate, i.e. expected values of future cash flows conditioned on business survival can simply be discounted with such a discount rate. The result holds both in bond and equity DCF valuation modelling. In order for the accounting-based residual income valuation model to appropriately capture the failure risk, an additional accounting “failure loss recognition” principle as well as a novel term in the model specification have been identified.Business failure prediction; DCF valuation; Bond valuation; Fundamental valuation; Residual income valuation

The Abnormal Earnings Growth Model: Applicability and Applications

We investigate a disaggregated version of the abnormal earnings growth (AEG) model of Ohlson and Juettner-Nauroth (2005). The value of the firm then becomes discounted free cash flows minus initial debt. Discounted free cash flows are equal to capitalized operating earnings from the initial stock of operating assets plus the present value of an infinite sequence of growth projects, where each growth project is valued by discounted economic value added. Sufficient conditions for the present value of the free cash flows to be equal to the sum of these two components are investigated. The Gordon growth formula is found to be one special case. Another case concerns lumpy growth projects with depreciation according to the annuity method. We then allow for three different interest rates, the required rate of return on equity under all-equity financing, the borrowing rate, and the required rate of return on equity under partial debt financing (the latter given by MM's Proposition 2). In the model of Ohlson and Juettner-Nauroth, these rates are the same. A firm-level model is developed that focuses on operating earnings and free cash flows with discounting at the required rate of return under all-equity financing. An equity-level model is then developed that focuses on bottom-line earnings and dividends with discounting at the required rate of return under partial debt financing. Relationships between the two models are explored. Dividend policy irrelevance holds only in a limited sense for the equity-level model.Financial analysis; abnormal earnings growth model; dividend policy; discounted dividends; discounted free cash flows; capitalized earnings; discounted economic value added

Valuation Errors Caused by Conservative Accounting in Residual Income and Abnormal Earnings Growth Valuation Models

The impact of conservative accounting in residual income valuation (RIV) and abnormal earnings growth (AEG) valuation modeling is investigated in this paper. Unconstrained and two types of constrained model specifications are evaluated regarding their ability to withstand biases in book values and earnings due to accounting conservatism. Given that the “clean surplus relation” holds and that the precision of forecasted accounting numbers is unaffected by the type of accounting principles, the unconstrained valuation models are – not surprisingly – found to be immune to conservatism. This does not hold for the constrained models, even though conservatism can be accommodated in these if the time-series specification of the conservative bias fulfils certain conditions. In a comparison between terminal value constrained models, the AEG model is found to be superior to the RIV model if the growth of the conservative bias in the terminal period is not too extreme. Comparing the information dynamics constrained models being proposed in Ohlson (1995) and Ohlson & Juettner-Nauroth (2005), the AEG model is potentially more accurate than the RIV model. However, in a company steady state setting with constant growth, there is no comparative advantage for the AEG model. Also, using the same set of forecasted accounting numbers in the information dynamics constrained RIV model as in the corresponding AEG model, the two models cannot be ranked.Abnormal earnings growth model; Accounting-based valuation; Conservative accounting; Financial analysis; Residual income model

Tower Houses in Medieval Scanian Towns

Towers in medieval towns is something normally connected to southern Europe. In Scandinavia, towers are seen as something belonging to castles and residences in the countryside, not to urban milieus. However, they are to be found even in Scandinavian towns. In this paper the existence of private urban tower houses in medieval Scania will be presented and discussed, and a hypothesis about a previously unknown tower house in Lund will be introduced

A possible basis for personality in dogs: Individual differences in affective predispositions

Previously, dog personality traits that seem to correspond have been identified by the Dog Mentality Assessment (DMA) and the Behaviour and Personality Assessment in Dogs (BPH): Playfulness, Sociability, Curiosity/fearlessness (DMA) vs. Non-social fearfulness (BPH), Aggressiveness, and Boldness. The first aim was to study the relationship between these traits. Correlation analyses on data from 1078 dogs subjected to both assessments revealed moderate correlation for Aggressiveness (r = 0.25) and high correlations (r = 0.47-0.59) for the other four corresponding traits, which indicates that they reflect similar aspects of dog personality. Considerable correlations were found after up to four years between assessments, suggesting temporal stability over longer periods of time. The second aim was to analyse the data set from a core-affect point of view. Two major dimensions were identified using principal component analysis and multidimensional scaling analysis (MDS). The first dimension was correlated positively with object play, pro-social behaviour, and exploration, and negatively correlated with fear-related variables, whereas the second dimension had its highest correlations with variables related to aggressiveness. The MDS analysis suggested a circular arrangement of the assessment variables in two-dimensional space, implying that several aspects of the assessed behaviour were related to both dimensions. The correlation pattern for data from a questionnaire related to everyday behaviour was in line with the results and provided additional information about the character of the two-dimensional space. The two dimensions may, at a state level, be interpreted as valence and arousal, respectively, and seem to reflect core affect in dogs. At a trait level, the dimensions seem to represent boldness and impulsivity, respectively. The second dimension may also indicate a coping strategy in challenging situations. From this point of view, the assessed behaviour may serve as the observable indicator for both stable personality and temporary affective states. Thus, the personality traits may, at least partly, be defined as individual differences in affective predispositions. From the current results, an affect-based model may be elaborated in which profiles of individual dogs or groups of dogs can be identified by the DMA and the BPH. There are several possible applications, for example in the identification of affect-related markers for problem-causing behaviour, welfare, and working performance in dogs. Due to the similarities with affect-and personality-related models used in humans, the two-dimensional space may be useful in comparative studies in areas such as genetics, well-being, mental health, and personality

The hierarchical structure of dog personality in a new behavioural assessment: A validation approach

Experimental assessments can be useful in the study of individual differences among dogs. One example of such assessment is the Dog Mentality Assessment (DMA), in which stable traits, referred to as personality traits, have been detected. Due to limited access to the DMA for dogs of non-working breeds, a new experimental assessment named Behaviour and Personality Assessment in Dogs (BPH) was developed in 2012 with the DMA as a model. In this study, behavioural ratings from 12,117 dogs assessed with the BPH were analysed in two steps: first, a hierarchical factor analysis procedure was carried out, and second, the construct validity of the extracted factors was studied. Two measures of validity were used: correlations with subjective ratings during the assessment (internal construct validity (ICV)) and correlations with data from a web-based questionnaire regarding everyday behaviour (external construct validity (ECV)). The ECV was also used to investigate on which level of the factor hierarchy everyday behaviour was best predicted. The approach revealed a hierarchy of factors, from one general factor at the top to 28 specific factors at the bottom, with generally high ICV. The first factor, Boldness, is related to six of the eight subtests and is associated with a positive attitude towards unfamiliar persons, interest for object play, low fear, and high degree of exploration. Most of the specific factors stem from the factors Sociability, Playfulness and Non-social fearfulness at the third level in the hierarchy, factors with high or at least moderate ECV. Sociability seems to be the best predictor for attitude towards unknown persons and dogs outside the assessment situation, including positive interest, fear, and aggression. The broader factors at the first levels correspond well to a range of everyday behaviours but for some behavioural tendencies more specific factors appearing at lower levels in the hierarchy were of greater importance. For example, noise-related fear was predicted first by a factor from the 12th factor level. The results from the ECV analysis indicate consistency between contexts and suggest that the BPH can reveal dog personality traits. The information from the assessment may give indications regarding welfare as well as potential problem-causing and preferred behaviour. Given a genetic basis for the traits, the most promising application is in dog breeding, where a combination of broad and narrow factors, relevant for the breed in question, may be used as measures in breeding objectives

The rebirth of U.S. console gaming: A historical comparison of Nintendo versus Sega 1983–2001

This master’s thesis examines the rival videogame companies Nintendo and Sega in the “console wars” of the 80s and 90s, and how they developed. After Atari brought home consoles into consumer consciousness, the market crashed and was picked back up by Nintendo who revitalized the industry. The ensuing battle between Nintendo and Sega spanned two decades. Gaming history is still in its infancy, struggling with a veneer of illegitimacy, but this rivalry has been a hot area of study by gaming historians. It is clear today that Nintendo survived this war while Sega had to bail out, but only some earlier research has gone in-depth in trying to find some of the underlying intricacies as to how this happened. This thesis is an attempt to answer the questions of how and why Nintendo won and Sega lost, and it will do so using four theories as lenses throughout the various gaming literature. These sources are heavily based on interviews with industry insiders, and by comparing and contrasting these sources the hope is to illuminate a new path forward for further research. The examined period has been divided into console generations because this correlates with the console races and eras where companies won or lost. The last section includes two generations in one due to Sega’s quick exit in its last generation. In the early period of the 3rd generation between 1983 and 1987, the focus is on how Nintendo rebuilt the crashed market and Sega struggled to compete against the burgeoning monopoly Nintendo was creating. In the middle period of the 4th generation between 1987 and 1993, Nintendo rose to its most powerful—yet so did Sega, late in the period. With the rivalry intensified, this period showed the climax of the battles taking place in terms of societal consequences and influence. In the last period of the 5th and 6th generations between 1993 and 2001, Nintendo continued going strong while Sega started to struggle against the new contenders entering the market, especially Sony. It is the how and why of these events, looked at through the theoretical framework, that this thesis attempts to highlight in the comparative sections and conclusion