Reconciliation of Residual Income and Free Cash-Flow Valuation Models

Raphael Kahan


May 21, 2009

Ohlson & Juettner-Naworth (2005) show, using a “scheme” developed in Ohlson 1998, 2000, that one can derive the residual income model from the discounted dividend model. However, their method involves the condition that an infinite sum (book value per share) divided by the infinite sum of discount factors will converge towards zero (“mild transversality condition”). Mathematically this needs not be the case as infinity divided by infinity is indeterminate. The following presents two reconciliation methods which are free from the convergence assumption.

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Keywords: Residual income, free cash flow, mild transversality

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Date posted: October 24, 2009  

Suggested Citation

Kahan, Raphael, Reconciliation of Residual Income and Free Cash-Flow Valuation Models (May 21, 2009). Available at SSRN: http://ssrn.com/abstract=1492062 or http://dx.doi.org/10.2139/ssrn.1492062

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