Business, Management and Accounting
4 years ago

New study reveals flaws in popular valuation methods, impacting financial decisions.

RePEc: Research Papers in Economics
Do the RIM (Residual Income Model), EVA® and DCF (Discounted Cash Flow) Really Match?
Ignacio Vélez–Pareja, Joseph Tham

Paper Summary

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The article compares different methods of valuing cash flows, including the Residual Income Model (RIM), Economic Value Added (EVA), and Discounted Cash Flow (DCF). While RIM and EVA are popular for assessing managerial performance, they may not always provide accurate valuations due to their reliance on book values. However, under certain conditions, RIM and EVA can produce results that match those of DCF methods. Various examples in the article demonstrate consistency between DCF, RIM, and EVA when using specific assumptions like constant discount rates or costs of capital.