SOME FORMAL CONNECTIONS BETWEEN ECONOMIC VALUES AND YIELDS AND ACCOUNTING NUMBERS

Authors

  • K.V. Peasnell

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      The author is Wolfson Professor of Accounting and Finance at the University of Lancaster. An earlier version of this paper was presented at the Northern Accounting Group, Birmingham University, on the 24th September 1981; thanks are due to the discussant Tony Appleyard and to the participants for their helpful comments. The paper has also benefited from the constructive criticisms of Tony Steele, Charles Ward, Ivey Papps and Bill Fung.


Abstract

This paper reports a number of results concerning the relationship between accounting numbers and economic values and yields. Some of the results have appeared previously in the literature and some are new. They have been collected together in a common analytical framework in order to demonstrate their formal, mathematical character. It is shown that present value can be obtained by discounting almost any profit numbers; that accounting rates of return define a discount function directly analagous to the term structure and the internal rate of return; and that the internal rate of return can be expressed as a linear weighted sum of accounting rates of return.

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