Assessment Based On The Corporate Value Of The Residual Income Method

The corporation is the basic economic unit of a human society. Since itsemergence, people have been persistently exploring the approaches to its valuation.With the forms of corporations evolving, accordingly, the definition of the valuationof a corporation constantly changes. Proper valuation of a corporation is a researchsubject, which has drawn substantial attention from researchers in the field of finance.The value of a corporation is a crucial factor taken into consideration whenmergence or investment occurs; moreover, with the evolution of the formscorporations take, the proper means of valuation often bring about improvement tocorporate governance, as well.The emergence of joint-stock corporations and the separation of ownership andmanagement have urged investors to attach more importance to a company'sprofitability and its protection for shareholders'interests. However, the conventionalapproach to a company's value, based on its fiscal data, usually quantifies assets ofthe company, emphasizing its safety rather than its profitability.Therefore, when the value of modern corporations being assessed, the priorityshould be given to their future profitability—the evaluation of the value creation. Forthose corporations bearing the aim to maximize stockholder value, the value creationis truly the source of shareholders'wealth.This paper incorporates the theory of Residual Income and the analysis ofexisting accounting data of the DuPond System to express the abstract concept ofvalue creation through basic financial ratios.This valuation model is characterized by the following traits:1) it reflects the objectivity and verifiability of accounting data;2) it meets the shareholders' or investors' demand for the maximized value of acorporation;3) meanwhile, to their most possible extent, the goals of shareholders and ofmanagement converge in the framework of this valuation model.This paper employs the audited accounting data from Shenzhen Stock Exchangeto analyze the value creation of Vanke Corporation, and the results have beenempirically verified by the data of stock exchanges from 2002 through 2004, andbased on the results, investment analysis has been conducted as well.The concept of corporation is constantly evolving, and it is also the case withvaluation models. Therefore, this paper makes a constructive attempt, utilizing theexisting financial data and Residual Income Valuation theory, to explore the valuationof corporations from a relatively objective perspective, in hopes of contributing to thetheory and practice in this field of study.