Capitalized Net Income and Residual Earnings as an Alternative of Discounted Cash Flow?

Both our and foreign practice prefer the discounted cash flow method for business valuation. The article analyses some relations between the discounted cash flow method and other income methods based not on cash flows but on earnings. Especially the economic value added method and the capitalized net income method belong among such methods. One of main surveyed relations between income methods is a fact that investments are captured in discounted cash flow method through expenditures while in methods based on earnings through cost of capital necessary for these investments. The article also researches relations between earnings and paid dividends within income valuation of a firm and points at one of advantages of the economic value added method compared to the discounted cash flow method – lower portion of continuing value in total value of a firm and consequently lower sensitivity to hardly estimated parameters for the second phase.