The Valuation of Shares and the Efficient-Markets Theory by Michael Firth

By Michael Firth

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By Michael Firth

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The individual contents of the above components of the annual report and accounts are governed by the Companies Acts of 1948 and 1967, the stock exchange and by the major accounting bodies. Although only the Companies Acts have legal sanctions, the other two forces do get acceptance of their recommendations. Specifically, the stock exchange can suspend the quotation of a company if it does not comply with the exchange's requirements and this will result in the loss of marketability of the firm's securities.

The process is repeated adding one more year of historical data (for example 6, 7, 8 and so on) until the growth horizon (the period at which the deviation of earnings reaches 7 per cent) increases no more. This becomes the period over which the firm's specific growth rate is expected to last. The terminal value at the horizon date is given by the computed price-earnings ratio (PER). This is assumed to be constant over all firms with (subjectively appraised) similar long-term growth prospects and similar levels of risk.

22 The Valuation of Shares and the EJficient-Markets Theory multiple, the product of which is discounted back to today's value (the derivation of appropriate multiples is dealt with later on p. 26). THE GOLDMAN SACHS MODEL A model similar to the above in concept has been developed by the American broking firm, Goldman Sachs. The model itself specifies the number of years for which the growth rate g is relevant. Beyond this date the growth rate is an average growth rate for a security of that risk class.

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