ABSTRACT
Textbooks and articles too numerous to mention caution against attempting to derive the economic value of a firm or investment by means of discounting future accounting profit numbers. Similarly, accountants and economists have long recognised the dangers of imputing economic significance to accounting profit rates. The conventional wisdom is summed up in the following recent statement by Appleyard (1980, p.543): “Indeed, it is well known that (conventionally measured) accounting income cannot be related to a firm’s capital stock in a simple way”. The purpose of the present article is to show how both a firm’s economic value and its economic yield can be derived from accounting numbers in a very simple fashion.
