Research On Income Approach Based On Revising The Continuing Operation Hypothesis

In many capital market activities,such as mergers,acquisitions,secondary offerings and equity transfer,The result of enterprise valuation is usually an important basis for one party to pay and it has been widely used.Therefore,how to improve the accuracy of enterprise value evaluation is a problem worthy of in-depth study in the theoretical and practical circles.The income method is the most theoretical basis in the evaluation of enterprise value.In the valuation of single financial asset or equipment,we usually determine the future earnings and the duration.But when we value the enterprise using the income method,the current practice is usually to assume that the valuation period is infinitely long and then use the Gordon Dividend Growth Model,Two stage or three stage discount model.The existing theoretical basis of this approach is the continuing operation hypothesis,but according to the newly auditing standard which was revised in 2016 and newly released <Professional standards-enterprise value>,substantive meaning of the continuing operation hypothesis does not support the indefinite period of assessment.Hence,based on life-cycle theory,economic analysis of the number of tolerable enterprises in the industry and the data of the present situation of Chinese Enterprises,the paper demonstrates the argument that the enterprise has a limited life span and then it is suggested that the valuation period should be limited.On the basis of this theoretical argument,the paper has improved the income approach model: using the same industry comparison method and regression analysis method to determine the evaluation period;introducing the time series regression prediction method and the grey prediction method for long-run forecast of free cash flow.From my research,It is considered that the rational determination of a limited evaluation period is more consistent with the theoretical basis and the actual situation in the use of the income method,At the same time,the calculation results of the case prove that to some extent,the evaluation results under limited period are more accurate than those under the perpetual valuation period,and the reference is more significant for determining the stock transaction consideration.