Residual Income Model Research Articles

Enterprise Value Assessment of Wuliangye Based on Improved Residual Income Model

Enterprise Value Assessment of Wuliangye Based on Improved Residual Income Model

Analysis of Earnings Quality and Enterprise Valuation of Microsoft by Earnings Quality and Residual Income Model

Artificial intelligence has had a remarkable influence in recent years and has developed many revolutionary solutions in many industries. OpenAI’s ChatGPT is one of the most popular products in this trend. As the largest stockholder of OpenAI, Microsoft has committed itself to integrating artificial intelligence into its primary products, like Microsoft Office and Azure. Although Microsoft experienced a continuous slump in stock in 2022, Microsoft’s current stock price has broken through $400 per share. This paper aims to conduct a financial analysis and forecast Microsoft’s future growth to figure out Microsoft’s intrinsic value. This article uses earnings quality analysis and residual income model to evaluate Microsoft’s financial performance and conduct valuation. Microsoft’s Cash Conversion Cycle has become negative since 2021, so Microsoft can reinvest the cash it receives from sales before using it to pay suppliers. The present value of the continuing value in the Residual Income Model indicates that Microsoft is undervalued compared to the current stock price. Economic conditions and the global supply chain will also influence investors’ expectations, except for quantitative factors. Therefore, Microsoft's stock price fluctuates and does not exceed the forecasted price. This article offers some insights on Microsoft and relevant industry valuation analysis.

Stock Valuation In Retail Trade Companies Listed On The Idx: Residual Income And Dividend Discount Model

Stock Valuation In Retail Trade Companies Listed On The Idx: Residual Income And Dividend Discount Model

Valuation of CATL Based on FCFF, Residual Income and Relative Valuation Model

Valuation of CATL Based on FCFF, Residual Income and Relative Valuation Model

Mutual fund value creation: Insights from the residual income model

Inspired by the residual income model used to assess firms’ value creation in the accounting field, we provide a new estimation approach to infer a fund's skills, value creation, and whether the value created by funds can predict future performance. Using a sample of 2069 active equity funds in China from 2011 to 2022, as predicted by this model, we find that the residual earnings of funds, which represent the value created through fund trading activities, are persistent. Additionally, we observe a strong and positive relationship between residual earnings and semi-year-ahead mutual fund abnormal returns. Specifically, the top quintile portfolio based on residual earnings outperforms the bottom quintile by 2.16 % abnormal returns per year. Furthermore, we note that Chinese mutual funds with higher residual earnings tend to be younger, smaller, and have substantial turnover. These findings are valuable for fund investors seeking to identify high-value funds.

Analysis of Stock Intrinsic Value and Projection of Financial Statements through a fundamental analysis approach to PT. Fast Food Indonesia, Tbk in 2022.

This study aims to determine the intrinsic value of PT. Fast Food Indonesia, TBK using the residual profit valuation model which can determine the value of equity at that time as the sum of the current book value and the present value of the estimated residual income in the future. This study uses a descriptive quantitative approach in presenting the results of the analysis. The data source in this study is the annual financial report of PT. Fast food Indonesia, Tbk in 2021 and 2022. Data collection techniques in this study used observation and documentation techniques. This research shows that the result of the projection is the intrinsic value of PT. Fast Food Indonesia Tbk in 2022 is Rp. 1.70 which was found based on the calculation of the prospective analysis in the residual profit valuation model (Residual Income Model). It was recorded that until the end of December 2022 the share price of PT. Fast Food Indonesia, Tbk is Rp. 820. So it can be concluded that the value of PT. Fast Food Indonesia, Tbk is overvalued or the stock market price is higher than the intrinsic value of the stock.
 Keywords: Stock instruction value, Financial statement, prospective analysis, financial ratio

An empirical evaluation of dynamic approaches for estimating firms’ expected cost of equity capital

AbstractWe develop and empirically validate dynamic approaches of implied cost of equity capital (ICC), facilitating the estimation of firms’ expected cost of equity capital at any required estimation date. Using on average 246,090 monthly observations, we empirically validate conflicting approaches for dynamic ICC estimation by analyzing the inferred market risk premia and assessing correlations with common risk factors. While the adjustments suggested by Daske et al. (2006) yield important and systematic deviations in the course of the year, the dynamic residual income model of Kempkes and Wömpener (2019) is robust to the choice of the estimation period.

Valuate Stock Based on Accounting Approach Using Feltham and Ohlson Model

Residual Income Model (RIM) is an accounting approach introduced and used by Feltham and Ohlson to measure firm value using future income based on most current information. The surplus relation applying firm earning and book value is used to forecast with consistent manner. This research uses RIM to valuate the pharmaceutical companies’ stocks listed on the Indonesia Stock Exchange (IDX) for the year of 2010-2019 to be able to estimate the intrinsic or fair values of the companies’ shares for the year of 2020-2023, compared to their current market values and used as the basis to make decisions. Macro economy information of Indonesia that strongly relate to the pharmaceutical companies are applied to forecast the future values of the companies and the stock market information to determine the market values and the investment interest rates. The stock intrinsic values of DVLA, INAF, KAEF, KLBF, MERK and PYFA are confirmed below the market values for the year of 2020-2023. But, the stock intrinsic values of SCPI are above the market values. Thus, the stock intrinsic values of TSPC are fair. There are 6 (six) company stocks overvalued or expensive, 1 (one) company stock is undervalued or cheap, and another is fair.

Comparisons of residual income model and growth value model

ABSTRACT Both the Residual Income Model (RIM) and Growth Value Model (GVM) combine the income-based approach and asset-based approach, and blend with the market-based approach, which employs regression analysis and market data to determine parameters in the models. Hence, they have more comprehensiveness than most approaches in the literature. The theoretical and empirical comparisons of RIM and GVM may have profound meaning to stock intrinsic value. The theoretical comparison shows that the ROE-P/B relationship is linear in RIM and power in GVM. When ROE equals the required return rate, whosever P/B is 1.0. When the ROE is small, the P/B estimated by GVM is still greater than 0; however, it may be negative by RIM, which is not reasonable. In a normal range (0 ~ 20%) of ROE, the two curves are rather close to each other. The empirical study showed that the GVM can more reasonablly fit the market data, especially when the ROE is rather small or great.

Analysis of Investment in Recent hot-topic companies in Renewable Energy Industry

Renewable energy is a forward-looking trend for the development of the energy industry. Recently, 5 renewable energy companies were found in Google search engine, which are highly researched by users, and there are also the 9 largest renewable energy companies. The study explores the question of whether these 5 top renewable energy companies are really remarkable or not compared with the 9 largest companies, and examines the question of which companies should be invested in and which should not.The study uses the residual income model and the multiples valuation model to evaluate the value of a company.The study concludes that the total 5 top companies all have higher risk than the 9 largest companies, which means that none of these 5 companies have a high probability of earning a high return. More specifically, Tesla Inc. is the company where investors have a chance to get a high return, while Gevo and Bloom Energy are two companies that need to be selected carefully. Plug Power and Sunrun are in the middle.

O duration da vantagem competitiva gera retornos de longo prazo no mercado de ações?

ABSTRACT The purpose of this article was to develop a new indicator to estimate the aggregate long-term expected return on stocks. There is not a widely used method to model directly the aggregated expected return of the stock market. Most current methods use indirect approaches. We developed a new indicator that does not need an econometric model to generate expected returns and provides an estimate of the long-term expected returns. The proposed methodology can be used to develop an indicator of future returns of the stock market similar to the yield-to-maturity used for bonds. We used a restricted one-stage constant-growth model - a variant of the residual income model (RIM) - whose main input is the duration of companies’ competitive advantage and cyclical adjusted real return on invested capital (ROIC) with a 10-year average. We used a new methodology to develop an indicator of the long-term expected return on the equity market at the aggregate level, considering the duration of the competitive advantage of companies. Our results showed a strong correlation between the estimated implied return on equity (IRE) of current stock prices and realized returns of the 10-year real total return of the index.

HOW MUCH DOES AN AFFORDABLE HOUSE COST TO BE PAID BY YOUNG PROFESSIONALS IN GREATER KL, MALAYSIA?

Affordability of housing has been a hot topic among various socioeconomic groups. Surprisingly, given the current situation, the majority of the young generation is negatively affected by this stressful issue. This study, therefore, focuses on young professional groups from the built environment profession, namely, the engineer, architect, urban planner, and quantity surveyor. These professional groups also earn an income between B40, M40 and T20. Two research objectives were composed in this study: (1) To measure the monthly affordable housing cost and (2) To define affordable housing types by different household income groups amongst young professional based on the residual income model (RIM), which is used to measure housing affordability. The surveys were distributed amongst 341 respondents selected through stratified random sampling. The findings have revealed that B40 can only bear a monthly housing’ costs not exceeding MYR 728, followed by M40 and T20 around MYR 2503 and MYR 6159, respectively. Hence, the B40 group had lesser house option types, i.e., around ten house types compared to M40 and T20.

The impact of COVID-19 on the valuations of non-financial European firms

This paper assesses the impact of the COVID-19 pandemic on non-financial firms' valuations in the European Union (EU) using a stress testing approach. Notably, the paper investigates the extent to which the COVID-19 may deteriorate non-financial firms' value in the ten EU countries to provide a robust anchor to policymakers in formulating strategic government interventions. We employ a sample of 5342 listed non-financial firms across the selected member states that have consistent analyst coverage from 2010 to 2019. First, we estimate the input sensitivities of free cash flow and residual income models using a random effect panel employed to in-sample data. Second, based on these sensitivities, we compute the model-driven ex-post valuations and compare their robustness with actual price and analyst forecasts for the same period. Finally, we introduce multiple stress scenarios that may emanate from COVID-19, i.e., a decline in expected sales and an increase/decrease in equity cost. Our findings show a significant loss in valuations across all sectors due to a possible reduction in sales and an increase in equity cost. In extreme cases, average firms in some industries may lose up to 60% of their intrinsic value in one year. The results remained consistent regardless of the cash flow or residual income-driven valuation.

Growth: rectifying two common mistakes

ABSTRACT The paper discusses two issues related to ‘growth’. Both lack a proper recognition in the literature. The first concerns growth and accruals. Research practice combines two components of accruals, asset accruals and liability accruals into a ‘net’. This aggregation causes problems: income-increasing asset accruals correlate positively with growth whereas the opposite holds for income-increasing liability accruals and growth. In light of this property, the paper re-configures Jones’s model. The second issue addresses forward P/E-multiple dependence on future growth in expected eps. It is shown that the textbook Gordon-Williams 1/(r-g) approach makes no sense. An alternative modeling views growth as information – not a parameter like Gordon-Williams. Thus, the P/E-multiple is shown to depend on the growth in expected earnings, Y2 vs. Y1. A similar g-parameter dependency is noted in the residual income model and the so-called OJ earnings growth model; both include a 1/(r-g) type of multiplier. This is viewed as a model-deficiency, that is, a ‘mistake’.

Valuation of Intrinsic Value of Construction Sector Stock Using Residual Income Model (RIM) and Dividend Discount Model (DDM)

This study aims to determine and analyze the intrinsic value valuation, consistency and influence of the intrinsic value of the shares of construction sector companies listed on the Indonesia Stock Exchange (IDX) from 2015 to 2019. The sample selection technique used in this study is full sampling and obtained as many as 12 companies with a total number of research samples is 48 samples. The data analysis technique used in this research is descriptive analysis using Microsoft Excel 2016 software and hypothesis testing was carried out using Panel Data Regression Analysis using E-Views version 9.0 software with a significance level of 5%. The results obtained in this study are (1) Based on the results of the consistency test carried out on the research sample using the Residual Income Model (RIM) and Dividend Discount Model (DDM) methods, the results of the consistency percentage are 47.92% consistent and 52.08 % inconsistent. (2) The intrinsic value of the shares calculated using the RIM method has no effect on the share price. (3) The intrinsic value of shares calculated using the DDM method has a positive and significant effect on stock prices.”

A PROPOSED ARCHIVAL EMPIRICAL RESEARCH METHODOLOGY TO TEST RELIABITIY AND VALIDITY OF DISCOUNTED RESIDUAL INCOME MODEL

Kerlinger and Lee (2000) defines reliability as “the proportion of the ‘true’ variance to the total obtained variance of the data yielded by a measuring instrument” and content validity as “representativeness or sampling adequacy of the content—the substance, the matter, the topic of measuring instrument”. The goal of this research is to provide an empirical research method to quantify the reliability and validity of residual income model in the prediction of the value of equity (stock price), by proposing to compare all active U.S. firms from 1981 to 2005 traded in the NYSE and the AMEX (the time period and listed stocks are subject to change based upon the availability of data from different sources). 
 JEL Classification Codes: G10, G17, M41, Z10.

Equity Valuation with Heterogeneous Beliefs

Residual income model in equity valuation has emerged as a useful reference for investment decisions on account of its theoretical foundations for analytical accounting research and also the basis of modelling for empirical study on value relevance. However, since investors have disagreement on firm's future earnings, it may have an effect on firm's evaluation and hence affect stock price. The paper extends the residual income model by incorporating investors' heterogeneous beliefs on the persistence of residual income, and then tests the theoretical findings through numerical simulation. The model implies that the relation between stock price and heterogeneous beliefs depends on the sign of residual income, and the impact of informed traders on stock price relies on the interaction effect of heterogeneous beliefs and residual income. The numerical simulation results prove that under the circumstance of positive heterogeneous beliefs, if residual income is also positive, stock price has a positive relation with heterogeneous beliefs and amount of informed investor; while if residual income is negative, stock price has a negative relation with heterogeneous beliefs and informed trading. The findings of the paper provide some useful theoretical implications on the effect of heterogeneous beliefs on equity valuation via residual income framework. Research limitations mainly exist in the strict theoretical assumptions, which can be loosen in further researches to make the model closer to real market.

A state space framework for the residual income valuation model of stock prices

We assess the empirical implications of the valuation model for equity prices developed in Ohlson (Contemp Account Res 11(2):661–687, 1995), by accounting for residual income information dynamics. A key assumption of the Ohlson (1995) residual income model stipulates that next period $$t+1$$ residual income is a linear function of current period t residual income and a latent variable referred to as ‘other information’. This ‘other information’, assumed known in the current period t, contains information on next period $$t+1$$ abnormal earnings not reflected in current period t abnormal earnings. Previous literature has proxied this ‘other information’ variable with consensus analysts’ forecasts of earnings. In this study, we propose to estimate this latent ‘other information’ variable using a state space framework. Our method obviates the need for analysts’ earnings forecasts. We estimate the valuation model, within the embedded state space framework, using the Kalman filter recursive procedure. We estimate the model across a sample of stocks in the Dow Jones 30 and S&P 500 indices. We compare the model performance to a benchmark two-step regression approach used in previous work. Performance yardsticks indicate that our state space estimation approach shows promise in valuing stocks and predicting next period $$t+1$$ residual income relative to the benchmark approach.

Effects of Intellectual Capital on Firm Performance Using RIM

In today’s socioeconomic world, it is frequently thought that the intellectual capital has an important role in a firm’s performance. Nonetheless, some of the recent findings support this idea whereas some point to the opposite, warranting further research to test the relationship in this context. In this study, we intend to determine the intellectual capital’s (IC) potential effects on a firm’s performance using a sample from a developing country, Turkey and measuring it with the help of Residual Income Model (RIM). For this purpose, nine-year data, obtained after the examination of the financial statements of 85 enterprises from 11 different sectors operating in Istanbul Stock Exchange in the period of 2007-2016, were used. With the purpose of forming an inclusive empirical model, the intellectual capital values were analysed on traditional performance indicators in the form of return on asset (ROA), asset turn-over rate (ATO), market/book value (MB) and return on equity (ROE), using the panel analysis method appropriate to the data set. Moreover, in order to distinguish the intellectual capital effect from the effects of other assets of the firm as well as to determine the existence of the sectoral effect, firm size and leverage ratio and dummy variables representing the sectors were added to our regression models. results showed that intellectual capital has a positive effect on return on asset and market/book value at firm level and on asset turn-over rate across sectors. When these findings are taken together, it can be inferred that intellectual capital has a significant, although not as strong as expected, impact on firm performance in the context of Turkey. With these outcomes, our study produces significant results in terms of the interaction between intellectual capital and firm performance in a developing country and contributes to understanding of the concept of intellectual capital. * This study has been prepared from the doctoral thesis The Effect of Intellectual Capital on Business Performance: An Application in BIST Companies.

The residual income model cannot challenge the discounted cash flow method in stock valuations - An analysis of global manufacturing and service companies

The residual income model (RIM) exists in the literature as a theoretical concept for almost a hundred years, however, it could never match the popularity and relevance of the discounted cash flow ...