Study On The Improved Residual Income Model Based On P/E

Enterprise valuation not only provides a scientific and reasonable measure of the value forexternal property exchange, but also is an important tool for company value management.With the globalize economy, the enterprise value appraisal has been caused widespreadconcern. In China, the related theories on corporate valuation is not mature, less than those indeveloped country, and some result of the valuation are not correct. Thus, this paper studiesresidual income model, and puts forward the improvements of this model aiming to improveits correctness and the performance of practice.This paper methodically explains and compares the five current methods of enterprisevaluation. And it is shown that the discounted income valuation, which includes dividenddiscount model, discounted cash flow model and the residual income model, is the mostpopular method of valuation that can best reflect the corporation value. So, this paperanalyzes the principles of those three models, and finds that residual income model canclosely connect the business rights and interests value with business accounting variable andbest reflect the companies’valuation.This paper analyzes the residual income model, and put forward its improved model. Afterintroducing and analyzing the research background, research situation, the principle andcharacteristic of this model, the paper find that residual income model has its owndisadvantage, namely the hypothesis of going concern and the long-term return forecastseriously deviates from the reality. Therefore, this paper suggests the improved residualincome model based on P/E. This improved model not only solves the difficulties of thehypothesis of going concern and the long-term return forecast, but also achieves the aim toevaluate the enterprise more accurately.When assessing the value of enterprise, the correctness of the improved residual income model depends on the correctness of the P/E in the improved model. Therefore, it is importantto compute the appropriate P/E. In order to obtain the appropriate P/E in the improved model,this paper applies the factor analysis and clustering analysis technology to choose thecomparable companies. Specifically, it first needs to build a financial index system that cancalculate the similarity of companies, and then the factor analysis and clustering analysis willbe used to choose the companies which have high similarities. Finally, this paper will choosethe listed company of electronics industry as samples, and use this method practically tocalculate P/E.Finally, this paper provides an empirical method to testify the accuracy and feasibility of theimproved residual income model based on P/E by using the listed company of electronicsindustry as samples. It has been shown that this improved model is valid and can perfectlyreflect the value of the companies.