This format requires the changes in book value. This makes equal earnings after reducing dividends and provides net of capital contribution. This relation according to Ohlson is a clean surplus relation as the changes in assets and liabilities are passed through the income statement. It is better to use this theory without connecting it to a user's perspective on accounting data.
The numerous methods followed in valuing derivative securities include valuing an option on a stock or index that can pay continuous dividends. The unfamiliar or foreign contracts will have no closed form of solution. This needs Monte-Carlo simulation, numerical integration, analytical and series approximation. The probabilities of a jump process by Schwartz in 1998 are to underlie the diffusion process corresponding to the coefficients of the difference equation. The trinomial tree is termed as equivalent to the explicit finite difference. This generalized multinomial jump process equivalent to a complex implicit finite difference in approximation. The two state lattice approaches has proved to be powerful tool and can be used to value a wide variety of contingent claims. The standard binomial approach is generalised and was included in the main existing models as particular cases of alternative approach. There are alternative analytical approximations for continuous time valuation like CRR model in case of single state variable. The lattice approach in valuating the option was based on a moment matching methodology. The introduction of numerically optimised parameter the non negativity of the risk neutral probabilities was ensured. 1
2. Deprival Value Approach
2.1 Equity valuation : In the following equation the P is obtained by discounting the expected value.
Let the dt = $5
Let the cost of equity = 6
R = 7
T = 1
= 5. 7-1 = 5/7 = 0.714
In order to have clean surplus identity
Bt = bt-1 + xt- dt = 1000000 + 100000 - 5
= 1099995. In this manner the book value of a particular year depends on the book value of the previous year and the expected discount of the present year. The book value may decrease if the expected dividend is more.
2.2 Deprival value: The deprival value approach to the computation of depreciation is important. The depreciation is considered as a single technique that is devoid of theoretical economic content. This helps in assigning the cost to the products or periods. The time can be considered as opportune to resurrect any idea. The connection of deprival values with implicit pricing in a used asset market. The attention of the investors should be drawn towards the deprival value depreciation model. The clarification of certain issues that are cause for the difficulty and highlighting the deprival values are necessary and are important properties. 2
2.3 Valuation model and information dynamics: The valuation model and information dynamics has attracted considerable attention among accounting researchers. The valuation can be done by residual income valuation model and information dynamics is linear. The firm value is expressed as the sum of the book value of equity. The present value of future abnormal earnings is also included. The dividend discount model finds an application in residual income v