GIORGI RUSIASHVILI, Candidate of Economic Science, TSU, Sokhumi branc Associated Professor, ACCA (II step), EKATERINE DEMURIA
The income model assumes that the trend of business variations and economic productivity capacity of the object of appraisal (business valuation) are independent of each other, and that an increasing trend in business variations is not linked to increasing economic productivity capacity of the object of appraisal (business valuation).
If there is no evidence of a decreasing trend in the sale of company and the company is thus viable, in such circumstances use of the income model may be acceptable.
The model assumes that the historic pattern of the trend and the business variations will continue in the future. This may not happen for a number of reasons, for example because of the occurrence of unexpected events or because of changes in consumer preferences. The forecast sales figures should be compared with the expectations and opinions of sales staff, who may have a more detailed knowledge of likely sales and market factors.
The reliability of the forecasting method is linked to the amount and accuracy of the data analyzed. Since only of data has been considered the forecast is unlikely to be reliable. The reliability of the forecasting period decreases, as the forecasting period increases.
Equivalent annual growth rate:
(Future value /to current value)1/n – 1),
n – number of periods
period = last year corresponding to future value – initial year corresponding to current value
Dividend growth model:
V/ EPS = D1 / EPS / (Ke – g)
Ke is RRR (RRR increasing, PER decreasing)
g – growth rate of the company (g decreasing, PER increasing)
D1 / EPS = ratio of next years dividends /to earnings
higher the ratio, higher PER.