Linear interpolation and Lintner: Difference between pages

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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.


 
== See also ==
<span style="color:#4B0082">'''Example 1: Linear interpolation'''</span>
* [[Dividend irrelevancy theory]]
 
* [[Residual theory]]
Consider a set of cashflows which has:
 
Net present value (NPV) of +$4m at a yield of 5%.
 
Net present value (NPV) of -$4m at a yield of 6%.
 
 
Using linear interpolation, the estimated yield at which the cashflows have an NPV of $0 is given by:
 
5% + ( +4 / ( +4  -  -4 = +8 ) ) x ( 6 - 5 )%
 
= '''5.5%'''.
 
5.5% is the estimated internal rate of return (IRR) of the cashflows.
 
 
==Interpolation and Iteration==
Interpolation is often used in conjunction with Iteration.
 
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.
 
5.5% and the recalculated NPV would then be used with interpolation once again to further refine the estimate of the IRR.
 
This iteration process can be repeated as often as required until the result converges on a sufficiently stable final figure.
 
 
==Extrapolation==
 
Another closely related linear estimation technique is extrapolation. 
 
This involves the straight-line estimation of values outside the range of the data used to do the estimation with.
   
   


<span style="color:#4B0082">'''Example 2: Extrapolation'''</span>
Using the data above, the estimated net present value at 7%, using extrapolation:
= -$4m - $8m
= -$'''12m'''.
== See also ==
* [[CertFMM]]
* [[Internal rate of return]]
* [[Interpolation]]
* [[Iteration]]
* [[Linear]]
* [[Straight line]]

Revision as of 14:20, 23 October 2012

Corporate finance. The author of an influential study on dividend payout ratios in practice.

See also