imported>Doug Williamson |
imported>Administrator |
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| A straight-line estimation method for determining an intermediate value.
| | ''Corporate finance''. |
| | The author of an influential study on dividend payout ratios in practice. |
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| | | == See also == |
| <span style="color:#4B0082">'''Example 1: Linear interpolation'''</span>
| | * [[Dividend irrelevancy theory]] |
| | | * [[Residual theory]] |
| Consider a set of cashflows which has:
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| Net present value (NPV) of +$4m at a yield of 5%.
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| Net present value (NPV) of -$4m at a yield of 6%.
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| Using linear interpolation, the estimated yield at which the cashflows have an NPV of $0 is given by:
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| 5% + ( +4 / ( +4 - -4 = +8 ) ) x ( 6 - 5 )%
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| = '''5.5%'''.
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| 5.5% is the estimated internal rate of return (IRR) of the cashflows.
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| ==Interpolation and Iteration== | |
| Interpolation is often used in conjunction with Iteration.
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| Using iteration the straight-line estimated IRR of 5.5% would then be used, in turn, to recalculate the NPV at the estimated IRR of 5.5%, producing a recalculated NPV even closer to $0.
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| 5.5% and the recalculated NPV would then be used with interpolation once again to further refine the estimate of the IRR.
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| This iteration process can be repeated as often as required until the result converges on a sufficiently stable final figure.
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| ==Extrapolation==
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| Another closely related linear estimation technique is extrapolation.
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| This involves the straight-line estimation of values outside the range of the data used to do the estimation with.
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| <span style="color:#4B0082">'''Example 2: Extrapolation'''</span>
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| Using the data above, the estimated net present value at 7%, using extrapolation:
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| = -$4m - $8m
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| = -$'''12m'''.
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| == See also ==
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| * [[CertFMM]]
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| * [[Internal rate of return]]
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| * [[Interpolation]]
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| * [[Iteration]]
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| * [[Linear]]
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| * [[Straight line]]
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