The plowback ratio is used to refer to that portion of earnings retained and reinvested in the firm and the firm’s ROE . The growth rate is then calculated as g= plawback x ROE

When estimating the terminal value, the growth rate should reflect the steady-state perpetual growth rate and should not reflect any bias resulting from higher than normal short-term growth estimates

In order to account for the uncertainty or riskiness of future cash flows, one can either risk-adjust the cash flows or the discount rates. It is more common to adjust the discount rates, a discount rate higher than Rf will diminush the discounted value

The beta selected for valuation purposes can be measured by the target firm’s beta directly or by using an industry-wide beta. Industry-wide betas should be interpreted carefully and adjustments may be required to reflect factors such as Mix of business and Financial leverage

Although it would likely be more accurate to use a different risk-free rate for each time period, it is more common and simple to use one single rate

Growth rates and discount rates are not independent of each other, growth rates are typically higher when assuming more risk (i.e. higher discount rate) and are lower when assuming less risk

Abnormal earnings are less likely to continue in perpetuity and are more likely to decline to zero as new competition is attracted to business with positive abnormal earnings, unlike DDM or DCF

Accounting rules that distort estimates of earnings will also distort the estimates of book value and will eventually reverse themselves. i.e. si une décision vient reduire la book value, elle va augmenter les abnormal earnings et la valeur finale va etre la meme.

Usually DCF method assumes the free cash flow grows in perpetuity, this is unlikely given competitors will enter
the market and squeeze the profit. Abnormal earnings method, instead, only assume the abnormal earning exist
for a period of time, which is more realistic.

An additional benefit of this approach is that it de-emphasizes the importance of the terminal value estimates and the assumptions that drive those

May be relevant to adjust the reported book value to reflect tangible book value, by removing intangible assets such as goodwill

Earnings in excess of the investors’ required earnings are referred to as the “abnormal” earnings

DDM and DCF both adjust the account-based net income measure into a cash flow measure, such as dividends paid or free cash flow, whereas AE does not require a cash flow measure

According to this method, if the firm can earn a return on equity capital equal to a “normal” return demanded by its shareholders, then the market value of the firm’s equity should exactly equal its book value

The net effect of all assumptions from other valuation methods can often be summarized as a “multiple” to be applied to a selected financial measure, such as next-period’s earnings, cash flow or book value

The ratio can be presented using the estimated future period’s earnings or the prior period’s actual earnings. When using future earnings, we call it the forward P-E ratio (or leading P-E ratio). When using actual earnings, we call it the trailing P-E ratio

Is commonly preferred over the P-E ratio when valuing banks, insurance companies and other financial services firms with substantial holdings in marketable securities

Control premiums – dans les merger and acquisition (MA) transactions, le prix peut contenir un "control premium" qui reflete la willingness de la compagnie de payer plus pour gagner le controle de la compagnie et ses opperations.

Overpricing in M&A transactions – This suggests that acquiring firms have a tendency to overpay.

Underpricing in IPO transactions – Il a ete documenté que les IPO tendent a etre underpriced

Reported financial variables The reported multiples will be based on either the prior period’s financial statements or some published analysts’ estimates of next period’s financial statements. The prices themselves may have been based on different forecasts, as a result, the multiples may not accurately reflect the buyer’s underlying assumptions about growth rates, ROE assumptions and discount rates

Underlying economic assumptions – Key valuation variables that are embedded in these multiples, such as interest rates, industry growth rates and industry profitability outlooks, may no longer be appropriate

The definition of dividents is not clear for all stockbuyers, some may change it to creat value for the stock