EBO - Model
Edward Bell Ohlson (EBO) is a residual income model, provides
for a simple but powerful technique for valuation of companies.
The EBO model is theortically derived from dividend discount
model and is also equivalent to present value of discounted cash
flows form DCFs. The EBO model overcomes the weakness of high
sensitivity of Terminal value in DCF analysis. I am presently
undertaking a study to usefulness of the model and look at
correlation with the contemporary stock prices in the singapore
market.
EBO Links:
Edwards-Bell-Ohlson (EBO) valuation technique.
The term Edwards-Bell-Ohlson, or EBO, was coined by Bernard (1994). Theoretical development of this valuation method is found in Ohlson (1990, 1995), Lehman (1993), and Feltham and Ohlson (1995). A stock's fundamental value is typically defined as the present value of its expected future dividends based on all currently available information. Notationally,
V t * is the stock's fundamental value at time t, E t (D t + i ) is the expected future dividends for period t+i conditional on information available at time t, and R e is the cost of equity capital based on the information set at time t. This definition assumes a flat term-structure of discount rates.It is easy to show that, as long as a firm's earnings and book value are forecasted in a manner consistent with clean surplus accounting, Equation (1) can be rewritten as the reported book value, plus an infinite sum of discounted residual income: