Barriers in the Calculation of Residual Income in Slovak Companies

Abstract

The question of the value of company and the value of company’s goodwill is an actual topic not only in Slovakia but also abroad. The often interest of scientific researchers is a difference between the market value of company and the book value of company. Because this difference is often a situation, which is created in real economic conditions. In general, scientific literature states the idea that difference between the market value of company and the book value of company represents relevant valuation for company’s goodwill. It means that company’s goodwill is the source of the market value of company creation. This paper deals with the issue of relevant valuation of company’s goodwill. This paper uses, as basic concept, the idea of residual income for valuation of the value of company and the value of company’s goodwill. According to the theory of residual income, residual income represents the value of income which company creates over the level of its cost of equity. Required income from the side of company’s owners represents basic normal income which the company had to create. Any income which the company creates over the level of its cost of equity represents residual income. Based on these facts, residual income is defined as a difference between net income and the equity charge. The concept of residual income uses, for example, Feltham-Ohlson model, which determines the value of company as the sum of the book value of company’s equity and the present value of its future residual income. Application of information from company’s financial statements represents the advantage of this model. The main aim of this paper is to calculate the value of company’s residual income (calculation consists of earnings after taxes, book value of equity, and the cost of equity). On these outputs, this paper determines other statistically significant variables, which could have impact on the value of company’s residual income. The secondary aim of this paper is to discover the statistically significant variables, which could be considered as the sources of company’s goodwill. This paper works with the data set of Slovak companies. The data set consists of 11,483 financial statements of Slovak companies. For calculation of earnings after taxes and the book value of equity, this paper uses information from financial statements of this data set of companies. For calculation of cost of equity, this paper uses the capital asset pricing model, according to the recommendation of Feltham-Ohlson model. Calculation of secondary variables, which could have impact on the company’s goodwill, is primary based on the information from financial statements of the data set of Slovak companies. This paper uses, as a relevant statistical method for determination of statistically significant variables, the multiple linear regression.