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OT: How to estimate a and p in E=aB+pB from multiple observations of E and B?

Posted By: leobueno
Date: Wednesday, 21 December 2011, at 5:10 p.m.

Assume naively that a company's earnings are a function only of its book value.

Assume also that book value is made up two types of assets, "active" which contribute to earnings, and "passive" which do not. Think of a manufacturing business that collected an extravagant art collection. The art should not contribute much to widget-making, thus is the "passive" component of book value.

So, we can say

E[n] = aB[n] + pB[n]

where n is the year, a and p are the proportion of active and passive book value, B, for the nth year. Obviously, a + p = 1.

We have multiple observations of E[n] and B[n],

Year, n, E, B

2005, 1, 25, 280

2006, 2, 32, 290

2007, 3, 34, 305

...

The question is how do we go about estimating a and p from the yearly observations of E and B?

Messages In This Thread

• OT: How to estimate a and p in E=aB+pB from multiple observations of E and B?
  leobueno -- Wednesday, 21 December 2011, at 5:10 p.m.
  • OT: How to estimate a and p in E=aB+pB from multiple observations of E and B?
    Casper van der Tak -- Wednesday, 21 December 2011, at 5:37 p.m.
    • OT: How to estimate a and p in E=aB+pB from multiple observations of E and B?
      Nack Ballard -- Wednesday, 21 December 2011, at 8:29 p.m.
      • LOL *NM*
        Casper van der Tak -- Wednesday, 21 December 2011, at 9:12 p.m.
    • OT: How to estimate a and p in E=aB+pB from multiple observations of E and B?
      leobueno -- Tuesday, 27 December 2011, at 1:27 p.m.
      • OT: How to estimate a and p in E=aB+pB from multiple observations of E and B?
        Casper van der Tak -- Tuesday, 27 December 2011, at 4:04 p.m.