ACCOUNTING ESTIMATE is an approximation of a financial statement element. Estimates are included in historical financial statements because some amounts are
uncertain pending outcome of future events and relevant data about events that have occurred cannot be accumulated on a timely, cost-effective basis.
DIVIDEND CAPITALIZATION: Since most closely held companies do not pay dividends, when using dividend capitalization valuators must first determine dividend paying capacity of a business. Dividend paying capacity based on average net income and on average cash flow are used. To determine dividend paying capacity, near term capital needs, expansion plans, debt repayment, operation cushion, contractual requirements, past dividend paying history of a business and dividends of a comparable company should be investigated. After analyzing these factors, percent of average net income and of average cash flow that can be used for the payment of dividends can be estimated. What also must be determined is the dividend yield, which can best be determined by analyzing comparable companies. As with the price earnings ratio method, this usually produces a subjective result.
STATISTICAL is making inferences in uncertain situations using applied mathematics. Measurements from a small group (the sample) are used to infer the behavior of a larger group, the population. Probability theory determines how well the sample represents the population.
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