Improvement Of Residual Income Model

The corporation is the basic economic unit of a human society.Since its emergence, people have been persistently exploring the approaches to its valuation.With the forms of corporations evolving, accordingly, the definition of the valuation of a corporation constantly changes. Proper valuation of a corporation is a research subject, which has drawn substantial attention from researchers in the field of finance.The value of a corporation is a crucial factor taken into consideration when mergence or investment occurs; moreover, with the evolution of the forms corporations take, the proper means of valuation often bring about improvement to corporate governance, as well. The emergence of joint-stock corporations and the separation of ownership and management have urged investors to attach more importance to acompany's profitability and its protection for shareholders' interests. However, the conventional approach to a company's value, based on its fiscal data, usually quantifies assets of the company, emphasizing its safety rather than its profitability. Therefore,when the value of modern corporations being assessed, the priority should be given to their future profitability—the evaluation of the value creation. For those corporations bearing the aim to maximize stockholder value, the value creation is truly the source of shareholders'wealth.Presently,there are three methods to calculate business value, which are Income Method, Market Method, and Cost Method. While these three methods have their inherit disadvantages separately:For Income Method, there is logic mistake for the presumption of the business's continuous operation, which deviates from the business's actual life;For Market Method, its'strict with the choice of reference business, it's very had to find approprite reference business,meanwhile it presumes that the transaction market is fully effective, which also deviates from actual operation condition; For cost method, it focus on reconstruction cost and neglects the future income of the company bing as an integrated body.Residual Income Evaluation Model is a model that closely connects the business rights and interests value with business accounting variable, which becomes one of the most popular study topic in present America financial academy. While this model is one of same disadvantage with Income model to adopt business continuous operation. The author hence upgraded the Residual Income Evaluation Model. Firstly, through importing the price to book value in forecasting period as key indexes to evaluate long term income after forecasting period while not complying with the c onsumption of continuous business operation,it effectively overcomes the Income Method de Residual Income Method's disadvantage of capitalizing to long term income; Secondly the author imported DuPont Financial model to upgrade Residual Income index, through which, the forecast for residual income of fiscal year with the forecast for the margin of sale which reflecting business profitability, and the equity multiplier which reflecting business debt redemption capability with the asset to operation which reflecting business asset operation capability are connected together.Through forecasting margin of sale equity multiplier, and asset to operation, the difficulty to forecast Residual Income index in Residual Income Evaluation model is resolved. Through integrating the advantages of Income Method, Market Method, and Cost Method, the upgraded Residual Income Evaluation Model overcome the main disadvantages of capitalizing for long term income of the forecast period of Income Method, and of neglect to target business's future income of Cost Method, therefore it is an evaluation method with high operability. Adopting qualitative description and quantitative description, theory exploration and case application description, the auhor studied the application of the upgraded model of Residual Income Evaluation Model in the evaluation.This article is composed of four chapters.Author introuduce the Residual Income Model in detail in the first chapter. This chapter introduced the meaning of residual income firstly,;and then introduce basic mode of the residual income model, then elaborated four basic parameters and basic suppositions of residual income model; finally analysis the significance of introducting residual income model to empirical study and our listed companies.Author has analyzed comparison superiority and the flaws of present residual income model emphatically. It enumerated five kind of superiority of present residual income model to the Traditional enterprise value assessment methods. Then explained several flaws of present residual income model, last analyzed existive reasons of these flaws emphatically, indicated the necessity for optimizing the present residual income model.The third chapter is the key point of this article. In this chapter, author has carried on the optimization for flaws of the present residual income model which elaborated in last chapter of the article. Firstly, it introduced "Market price and net assets ratio "(Pt/BVt) of the end of forecast period, which has solved overestimate tendency of the present residual income model in enterprise evaluation.Then introduced the Dupont financial analysis system, which transform forecast of financial data to the basic financial ratio make the forecast data to be more scientific, objective; then, it also introduced computational method of the improved residual income model's parameters; Finally it introduced the application step and the superiority of optimized residual income model.The fourth chapter applies a example. This chapter has selected financial data of SANY Heavy Industry Limited Company's as a sample, has demonstrated appraisal process of the optimized residual income model, and.compared appraisal result with the present residual income model, has obtained formidable explanatory ability of the optimized residual income model to the enterprise evaluation..The concept of corporation is constantly evolving, and it is also the case with valuation models. Therefore, this paper makes a constructive attempt, utilizing the existing financial data and Residual Income Valuation theory, to explore the valuation of corporations from a relatively objective perspective, in hopes of contributing to the theory and practice in this field of study.