Application Of Residual Income (RI) To Evaluation Of Listed Company

In recent years, the capital market system construction of China takes a significant process. More and more persons and companies increase their property by investment. It is in dire need of finding a suitable method to appraise the intrinsic value of one company. This paper tries to find a scientific method to evaluate the intrinsic value of one company at present capital market environment.Value-based investment as one mature investment concept is being accepted by more and more investors. We can calculate different companies' intrinsic value by scientific valuation models and buy their stocks if their stock price is lower than their intrinsic value. We can get high return if we can use the right method. There are lots of different valuation models in practice, In this paper we discuss popularly used valuation models and point out their strengths and weaknesses of different models. The foreign empirical research had proved that the residual income model could measure the real valuation creation of one enterprise, because it considers the equity capital cost. The residual income valuation model utilizes the financial statements and makes the least changes of the financial statements, so it can keep the consistency of different periods' data. The residual income valuation model is better than the dividend model and the free cash flow model in measuring the valuation creation and interpreting the stock price changes. This paper selects the residual income model as the valuation model to assess the intrinsic value of one company. In the article we systematically interpret the theory basis of residual income model and construct how to use the model. Then we take a listed company, namely ZTE CORPORATION , as an example and detail the use of the model. In the end, we make some contrasts between the calculated intrinsic value and the price in capital market and then we will give some reasonable explanations about the difference, we also point out the direction of improving the accurateness of the model.