the loss of degrees of freedom when additional independents variables are added to a regression.
that the error term in the regression is covariance stationary. Therefore the two time series are cointegrated.
The parameters and standard errors from linear regression will be consistent and will allow testing of the hypotheses about the long-term relationships between the two series.
|Structural Model||Reduced Form Model|
and is defined as operating profit divided by capital employed
ROCE is useful when comparing peer companies in different countries because the comparison of underlying profitability would not be skewed by low taxes.
EBITDA overestimates cashflow from operations if the company’s working capital is growing.
Lack of Control Discount = 1 – (1 / (1 + control premium))
Remember: Discounts are usually multiplicative rather than additive.
CEY = CBY – b x LTEG + Residual
CEY = current earnings yield
CBY = Moody’s A-rated corporate bond yield
LTEG = consensus five-year earnings growth
b = coefficient measures the weight the market gives to five-year earnings projections
Justified P/E = 1 / CBY – b * LTEG
- It does not consider an equity risk premium.
- It ignores the portion of equity value that comes from long-term earnings growth.
- It compares a real variable (index yield) to nominal variable (government bond yield) which makes it unhelpful when inflation is either non-existent or very high.