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Theoretical questions
1.1 The emergence and development of valuation activities in Russia
Real estate valuation, as an element of state economic policy, began to take shape in Russia in the middle of the 18th century in connection with a change in the socio-economic system. First of all, this was due to the need to create a fiscal cadastre, that is, a description and assessment of real estate for tax purposes.
The formation of a real estate valuation system for tax purposes took place in Russia under the direct influence of similar work already completed in Western European countries by that time.
The reason for the creation of real estate taxation systems in most countries was the uneven distribution of taxes in the transition from capitation to income taxation. The basis of such systems was cadastres containing materials describing and evaluating real estate.
With the abolition of serfdom in 1861 in Russia, the preconditions for carrying out cadastral work arose, an integral integral part which was the valuation of real estate. Published in 1864 "Regulations on zemstvo institutions"provided for a change in the tax base and a partial transition to the taxation of property of Russian citizens. To replenish the state budget, the per capita taxation system was retained, and for the formation of the zemstvo budget, "lands, factories, plants, industrial and commercial establishments and, in general, real estate in counties and cities, as well as certificates for the right to trade. The amount of taxation was determined by the "yield and value of taxable property." By 1888, the poll tax was completely abolished.
Modern approaches to valuation issues, cultivated in the developed countries of the market economy, practically repeat in their basis the conceptual provisions laid down by the creators of Russian valuation statistics. By the beginning of the 20th century methodological developments and organizational approaches to valuation in Russia, which absorbed the advanced ideas and experience of the developed countries of that time, made it possible to achieve outstanding results in real estate valuation, often unparalleled in the world. An analysis of historical facts allows us to reasonably conclude that, through the efforts of its outstanding scientists, Russia, in terms of methodology and organization of real estate valuation, was one of the leading countries.
The peak of appraisal activity in Russia occurred in the second half of the 1990s, when the Institute for Economic Development of the World Bank for Reconstruction and Development began to train professional appraisers for the first time.
Evaluation development in Russian Federation it would be impossible without a system of training, retraining and advanced training of appraisers. One of the important events at the stage of formation of appraisal activity in Russia was the holding in 1993 of seminars on appraisal activity, organized by the Institute for Economic Development of the World Bank. A noticeable impetus to the development of education in the field of appraisal was given in the course of the formation and development of licensing requirements for the activities of appraisers.
58 structural regional units were created, which united 70 regions of Russia and neighboring countries. This organization established the Academy of Intellectual Property Valuation, which trained 15,000 appraisers by 2000. The Russian Appraiser Society laid the foundation for the creation regulatory framework Russian practice property valuation.
In June 1994, at the reporting and election conference of the ROO, the following were adopted: Declaration of the ROO, Standards professional activity in the field of real estate, the Code professional ethics members of the RSO. The next step in June 1995 was the registration of the standardization system with the State Standard of the Russian Federation. In the same period, together with the State Property Committee of the Russian Federation and the Russian Guild of Realtors, the Regulations on Licensing Real Estate Activities in the Russian Federation were adopted, in which appraisal activities were defined as an independent type of activity and removed from licensing real estate activities.
In 1996 appeared new organization- The National College of Appraisers (NCO), which includes firms involved in valuation. Since the end of 1996, the profession of appraiser in Russia already had an official status. Ministry of Labor and social development The Russian Federation, by its resolution of November 27, 1996, No. 11, approved qualification characteristic position "appraiser", which establishes job responsibilities and a list of legal and methodological documents and other information that the appraiser should know.
Main official duties appraisers are the establishment of the market value or other value of objects of civil rights, the study of the needs of the assessment and the establishment of business contacts with clients, the preparation of a written assessment report, the use of all known methods of assessment, the creation of an information base necessary for professional activities. Installed and qualification requirements for this position: higher professional education, additional education and at least 1 year work experience.
To date, in Russia, the activities of appraisers at the federal level are regulated by the relevant Federal Law of July 29, 1998, No. 135 - FZ “On Appraisal Activities in the Russian Federation”.
The methodological basis of the assessment is being developed, taking into account international experience, as well as features of the development of the economy and legal regulation in Russia.
A single market for appraisal services has been formed. Currently, within the framework of uniform requirements, on the basis of a federal license, more than 5,300 legal entities and individual entrepreneurs.
System formed state regulation appraisal activity, based on the Federal Law “On appraisal activity in the Russian Federation” and including control over compliance by appraisers with requirements and conditions, appraisal standards and guidelines requirements for the education of specialists.
Develop self-regulatory organizations appraisers. Their interaction with the Ministry of Property of Russia has been established on the entire spectrum of problems in the development of the appraisal market.
But we can also highlight the shortcomings inherent in today's practice in the field of property valuation in Russia:
1. Lack of methodological base;
2. Mismatch of foreign methodology market relations in Russia;
3. Distrust of customers to managers - appraisers involved in practice in this activity;
4. Lack of a sufficient number of highly qualified experts - appraisers in the regions;
5. Lack of practical experience in appraisal work among firms;
6. Lack of unified assessment standards.
1.1 What is the purpose of inflationary cost adjustment? What does inflationary cost adjustment include? Uncover the main methods of inflation adjustment
The purpose of the inflationary adjustment of documentation is to bring retrospective information for past periods to a comparable form; accounting for inflationary price changes when making forecasts cash flows and discount rates.
The simplest way to adjust is to re-evaluate all balance sheet items for changes in the exchange rate of the ruble against the rate of a more stable currency, such as the US dollar. More accurate is the revaluation of the assets and liabilities of the balance sheet for fluctuations in the levels of commodity prices. It can be focused both on the mass of goods in general, and on each specific product or product group.
A common release method financial reporting against inflation is a method of accounting for changes in the general price level.
The use of this method allows us to abstract from the material structure of the enterprise's assets and focus on the overall assessment of all property, taking into account the purchasing power of the monetary unit and its fluctuations over time, reflecting changes in the average price level. This method consists in the fact that various items of financial statements are calculated in monetary units of the same purchasing power (in rubles of the base or current period at the reporting date). For recalculations, either the GNP dynamics index or the consumer or wholesale price index is used. The universal form for recalculating balance sheet items and financial statements into monetary units of the same purchasing power is as follows:
Bn = Bb/(i1 + i0),
where Bp - the real value of the item, adjusted for inflation, rubles;
Wb - the nominal value of the article according to the data accounting and reporting, rub.;
I0 - inflation index in the base period or on the initial date of tracking the value of the balance sheet item.
Only the so-called non-monetary items should be subject to inflation adjustment for the index: fixed assets (including intangible assets), productive reserves, work in progress, finished products, obligations that must be repaid by the supply of certain goods and (or) the provision of certain services. Monetary items (cash, receivables and payables, credits, loans, deposits, financial investments), regardless of changes in the general price level, are not subject to inflationary adjustment.
Evaluation of non-monetary assets (liabilities) in monetary units of the same purchasing power is carried out as follows. All assets are grouped according to the years of their acquisition (occurrence). For each year, the valuation of a group of objects is recalculated using price indices current year and year of acquisition of objects, and then the results are summarized.
Test tasks
1. The economic principle, according to which the addition of additional resources to the main factors of production is effective as long as the net return increases faster than the growth of costs, is called:
the principle of production factors
principle of proportionality
marginal productivity principle
principle of supply and demand
the principle of competition.
11. What approach to business valuation is based on economic principle expectations:
comparative
costly
profitable
property
21. When conducting a tax assessment of property, the following is used:
limited market value
special price
replacement cost
31. The essence of the income capitalization method is expressed by the formula:
cost = net. approx. : capitalization rate
cost = revenue: capitalization rate
cost = net. approx. x capitalization rate
41. Investment market?
Market of real investment objects
Market of financial investment instruments
The market of both real investment objects and financial investment instruments
51. Investments expressing the investment of capital in the most risky assets (shares of young companies), where the maximum income is expected to be:
Low risk investment
Medium risk investments
Speculative investment
61. What type of investment is not included in investment in non-financial assets?
Investments in fixed assets
Investments in intangible assets
Investments in securities of other legal entities, in bonds of local and state loans
Investments in overhaul fixed assets
71. The duties and responsibilities of all subjects of investment activity are the same and do not depend on the sources of investment, forms of ownership new enterprises and productions.
81. The scope of circulation of securities not admitted to quotation on stock exchanges is:
stock market
over-the-counter market
futures market
91. The effectiveness of the project is determined by:
Cost-benefit ratio
Indicators of financial (commercial) efficiency
A set of indicators of commercial, budgetary, national economic efficiency
101. The longer the project implementation period until its full payback, the higher the level of investment risk.
111. The formula for determining the IRR (internal rate of return) by the linear approximation method is:
121. Who is affected to a lesser extent by the business plan of an investment project:
Investors
Entrepreneurs
Enterprise personnel
131. The self-financing mechanism does not include:
Borrowed funds
Sinking fund
Profit deductions
Insurance claims
141. The formula for determining the internal rate of return (IRR) is:
151. Adjustment of financial statements in order to bring them into line with uniform accounting standards is the purpose of:
calculation of relative indicators in the evaluation process
transformation of financial statements
normalization of financial statements
inflation adjustment data
161. An assessment of the value of an enterprise, subject to the acquisition of 100% control over it, can be obtained immediately:
asset accumulation method
discounted cash flow method
transaction method
capital market method
171. When the growth rate of an enterprise is moderate and predictable, then the following is used:
discounted cash flow method
income capitalization method
method net assets
Task #1
Calculate the real discount rate for the enterprise being valued if the nominal rate of return on government bonds is 25%. The average market return on the stock market is 19% in real terms. The beta coefficient for the enterprise being valued is 1.4.
Calculations are carried out according to the formula:
R = Rf+b(Rm-Rf),
where R is the desired discount factor;
Rf - risk-free rate of return (defined as the difference between the nominal rate of return and the inflation rate) = 6%;
b - coefficient, which is a measure of market or non-diversifiable risk and reflects the amplitude of fluctuations in the profitability of an asset relative to the market as a whole;
Rm - average market rate of return, determined based on the long-term total market return;
(Rm - Rf) - premium for the risk of investing in this asset.
R = 0.06 + 1.4 (0.19 - 0.06) = 0.242 = 24.2%.
Task number 11
discount rate enterprise capital
The market value of the company's ordinary shares is 13.6 million rubles, preferred shares - 5.1 million rubles. borrowed capital company is 8.5 million rubles. The cost (yield) of equity is 18%, preferred shares 11%, and bonds 9%. The risk index for the enterprise is 0.5, and the value of the interest rate of risk-free capital investment is 9%, the average for the stock market is 13%. Calculate the discount rate using the weighted average cost of capital model and the capital asset pricing model. Give an interpretation of the results obtained.
Let us first calculate the shares of each component of the capital. The total amount of the company is:
13.6 + 5.1 + 8.5 = 27.2 million rubles
Wd = 13.6 / 27.2 = 50%
Wp = 5.1 / 27.2 = 18.75%
We = 8.5/27.2 = 31.25%
It is convenient to calculate WACC using the table
Thus, the aggregated (weighted average) cost of capital of the company is 11.29 percent.
According to the capital asset pricing model, the company's cost of capital is:
Sk \u003d 0.09 + (0.13-0.09) * 0.5 \u003d 11%
Term - Definition
1) Annuities - a series of equal payments received or paid through equal periods of time within a certain period.
11) Liquidation cost - cost object of appraisal in the event that the object must be alienated within a period less than the usual period of exposure of similar objects
21) Market value is the most probable price at which the object of appraisal can be alienated for open market in a competitive environment, when the parties to the transaction act reasonably, having all the necessary information, and any extraordinary circumstances do not affect the value of the transaction
31) An enterprise is a property object and a certain structure of an organized economic activity for the production and (or) sale of products, works, services.
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Based on a comparison of the investor's future income with current costs. Comparison of income with costs is carried out taking into account time and risk factors. The dynamics of the company's value, determined by the income method, makes it possible to take the correct ones for managers, owners, the state, etc.
The capitalization method is used when it is expected that future net income will be or approximately equal to the current one or their growth rate will be moderate and predictable. Moreover, incomes are quite significant positive values, i.e. business will grow steadily. The indicator is usually used to evaluate enterprises whose assets are dominated by wearing equipment. For companies with significant real estate, the book value of which is decreasing, but the actual value remains almost unchanged, they prefer to use cash flow.
The essence of the capitalization method is to determine the amount of annual income and the capitalization rate corresponding to these incomes, on the basis of which the price of the company is calculated.
There are a number of problems with this method. Firstly, how to determine the net income of the enterprise, and secondly, how to choose the capitalization rate.
When calculating net income it is important to choose the right time period for which the calculations are made. It can be several periods in the past, usually five, or data on income for several periods in the past and forecasts for the near future can be used.
Another tricky part of this method is the determination of the capitalization rate.
The capitalization rate largely depends on the stability of the company's income.
If the latter has a steady growth in profits, a lower capitalization rate is chosen, which leads to an increase in the company and, conversely, with unstable profits, the capitalization rate is increased.
In some cases, companies are valued using gross revenue. It is most often used to determine the market value of a service business.
Sometimes for evaluation joint-stock companies is used . This method is preferable for shareholders who do not have a controlling stake, since for them the value of dividends is most important, and they cannot influence the company's policy on the issue of dividend payments. For shareholders with a controlling stake, it is preferable to use the capitalization of net income to determine the market value of an enterprise.
The main advantage of the income capitalization method is that it reflects the potential profitability of the business, allows you to take into account the risk of the industry and the company. However, this method is not suitable for fast-growing companies.
The method of discounting future income has become widespread in the practice of business valuation, as it allows you to take into account future development prospects.
Determining the income that will be received in the post-forecast period calculation of the current value in the forecast and post-forecast period.
Forecasting future income begins with determining the activity of the forecast period and the forecasting horizon and the type of income that will be used in further calculations. The forecasting horizon is divided into two parts: forecasting, when the Appraiser determines the dynamics of the company's development with sufficient accuracy, and post-forecasting, when the analyst calculates a certain average, fairly moderate growth rate.
It is important to correctly determine the duration of the forecast period. An excessively long period will require a lot of effort to make a realistic forecast. At the same time, the artificial shortening of the period leads to a distortion of the forecast, since in the first years the dynamics of income will deviate greatly from the average value of the company.
The income type determines the forecasting process and how the discount rate is calculated. If profit and dividends do not need special explanations, then the concept of cash flow must be specified. Cash flow is the result of the inflow and outflow of funds in the enterprise.
The amount of cash flow for equity is determined on the basis of the following data: balance sheet profit minus + + increase in long-term debt - interest on long-term obligations - - increase in own.
Cash flow for invested capital (total value of equity and long-term debt) allows you to determine the total market value of equity and long-term debt of the company. The value of this cash flow for invested capital is determined by the formula: profit after tax + depreciation - capital investments - increase in own working capital.
Cash flow for equity is different from invested. First, the net income for the invested cash flow is increased by the amount of interest on long-term loans. Secondly, when calculating the cash flow for equity, the change in long-term liabilities is taken into account, but not for the invested flow. The latter circumstance makes it possible to use the discounted cash flow method in cases where it is not possible to predict the dynamics of long-term debt.
One of the most difficult, but at the same time, the most crucial moments in evaluating companies with flow price methods is making a forecast of cash flows for the next few years. The possibility of deviation from the forecast is very high, so sometimes a range of forecasts is made - pessimistic, realistic and optimistic. An optimistic forecast is an assessment of the company's profitability when it operates in the most favorable conditions. Under real - a forecast made on the basis of the most probable conditions. Under the pessimistic - the forecast obtained on the basis of ideas about the functioning of enterprises in the worst conditions.
After that, an analysis and forecast of costs is made. Since the growth rates are constant and usually differ, the growth rates are predicted fixed costs and separately - the growth of variable costs. Based on the availability of fixed capital and forecasts of capital investments, the amount of depreciation is determined. Based on the analysis of company management and sales plans, administrative costs and costs for the sale of products (services) are determined. On the basis of plans for obtaining long-term loans, interest on the loan is calculated. Next, determine the amount of taxes that the company will have to pay.
As a result of the deduction from gross income of fixed, variable costs, depreciation and selling expenses, interest and taxes, a forecast of net income for each year of the forecast period is obtained.
An important step in the discounted cash flow method is , which includes:
Determining the surplus or deficiency of a net company. The surplus increases the market value of the company, and the deficiency must be made up, so it reduces the market value;
- calculation of change (increase or decrease) in long-term debt (for the model of cash flow brought from).
The next step in the valuation is to determine the discount rate. If the assessment is carried out on the basis of the cash flow brought by equity capital, then the discount rate is calculated either according to the capital asset valuation model (Capital Asset Pricing Mdel - САРМ) or using the summation method.
At the next stage of calculating the value of the business using the discounted future income method, the total amount of income that the owner can receive in the post-forecast period is determined. The calculation of income in the post-forecast period can be carried out by several methods, such as the cost method - the Gordon model (the "estimated sale" method).
The net asset method assumes that the value of net assets at the end of the last forecast year is known. The amount of net assets at the end of the forecast period is determined by adjusting the amount of net assets at the beginning of the first year of the forecast period by the amount of cash flow received by the company for the entire forecast period. The application of the net assets method is advisable for enterprises belonging to capital-intensive industries.
Gordon's model defines the company's value at the beginning of the first year of the post-forecast period as the amount of capitalized income of the post-forecast period (that is, the sum of the values of all annual future income in the post-forecast period).
Income growth must be stable.
Income growth rates cannot exceed the discount rate.
Capital investments in the post-forecast period should be equal to depreciation deductions (for the case when cash flow acts as income).
Discounting the residual value at the discount rate taken at the end of the forecast period is due to the fact that the residual value, regardless of the method of its calculation, always represents the value at a specific date - the beginning of the post-forecast period, that is, the end of the last forecast year.
To derive the final value of the market value of the company, a number of amendments are made.
1. If the discount model was used without debt invested cash flow, then the found market value (PV) refers to the entire invested capital, that is, it includes not only the cost of equity la, but also the value of the company's long-term liabilities. Therefore, in order to obtain the cost of equity, it is necessary to subtract the value of long-term debt from the value found.
2. Calculated using the discounted cash flow method, the value is the value of the enterprise, which does not include the value of excess and non-performing assets that did not directly participate in generating income. Such assets are valued separately, and the result is added to the market value of the company. There are four types of object subject to separate assessment and accounting in value: own working capital; obligations related to the implementation of environmental protection measures; objects social sphere; fixed assets under conservation.
The method of enterprise valuation based on discounting future income has a number of advantages and disadvantages. It allows you to reflect the future profitability of the company, which is of most interest to the investor. This takes into account the risk of investment, possible inflation rates, as well as the situation on the market through the discount rate. This method takes into account the economic obsolescence of the company, which is an indicator of the excess of the market value obtained by the accumulation of assets method over the value of the market value obtained by discounting future income. World practice has shown that this method most accurately determines the market value of an enterprise, but its use is difficult due to the difficulty of making a fairly accurate forecast.
The task of assessing the value of a business at different stages of its development does not lose its relevance. The enterprise is a long-term asset that generates income and has a certain investment attractiveness, so the question of its value is of interest to many, from owners and management to government agencies.
The most commonly used method for estimating the value of a business is income method (income approach), because any investor invests money not just in buildings, equipment and other tangible and intangible assets, but in future income that can not only recoup the invested funds, but also bring profit, thereby increasing the investor's well-being. At the same time, the volume, quality and duration of the expected future income stream play a special role when choosing an investment object. Undoubtedly, the amount of expected return is relative and is subject to a huge influence of probability, depending on the level of risk of a possible investment failure, which must also be taken into account.
Note! The underlying cost factor when using this method is the expected future income of the company, which represents certain economic benefits for the owners of the enterprise. The higher the income of the company, the greater, other things being equal, its market value.
The income method is the best way to take into account the main goal of the enterprise - making a profit. From these positions, it is most preferable for business valuation, as it reflects the prospects for the development of the enterprise, future expectations. In addition, it takes into account the economic obsolescence of objects, and also takes into account the market aspect and inflationary trends through the discount rate.
With all the undeniable advantages, this approach is not without controversial and negative points:
- it is quite laborious;
- it is characterized by a high level of subjectivity in forecasting income;
- the proportion of probabilities and conventions is high, since various assumptions and restrictions are established;
- the influence of various risk factors on the predicted income is great;
- it is problematic to reliably determine the real income shown by the enterprise in the financial statements, and it is not excluded that losses are deliberately reflected for various purposes, which is associated with the lack of transparency of information of domestic enterprises;
- complicated accounting of non-core and surplus assets;
- incorrect assessment of unprofitable enterprises.
It is imperative that special attention be paid to the ability to reliably determine the future revenue streams of the enterprise and the development of the company's activities at the expected pace. The accuracy of the forecast is also strongly affected by the stability of the external economic environment, which is relevant for the rather unstable Russian economic situation.
So, it is advisable to use the income approach to evaluate companies when:
- they have a positive income;
- it is possible to make a reliable forecast of income and expenses.
Calculation of the company's value using the income approach
Estimating the value of a business using an income approach begins with solving the following tasks:
1) forecast of future income of the enterprise;
2) bringing the value of the future income of the enterprise to the current moment.
The correct solution of these problems contributes to obtaining adequate final results of the evaluation work. Of great importance in the course of forecasting is the normalization of income, with the help of which one-time deviations are eliminated, which appear, in particular, as a result of one-time transactions, for example, when selling non-core and excess assets. To normalize income, statistical methods are used to calculate the average, weighted average medium size or an extrapolation method representing is a continuation of existing trends.
In addition, it is necessary to take into account the factor of changes in the value of money over time - the same amount of income at the moment has a higher price than in the future. The difficult question of the most acceptable timing for forecasting the company's income and expenses needs to be resolved. It is believed that in order to reflect the inherent cyclicality of industries, a reasonable forecast should cover a period of at least 5 years. When considering this issue through a mathematical and statistical prism, there is a desire to lengthen the forecast period, assuming that a larger number of observations will give a more reasonable value of the company's market value. However, a proportional increase in the forecast period complicates the forecasting of income and expenses, inflation and cash flows. Some appraisers note that the forecast of income for 1-3 years will be the most reliable, especially when there is instability in the economic environment, since with an increase in forecast periods, the conditionality of estimates increases. But this opinion is true only for sustainable enterprises.
Important!In any case, when choosing a forecasting period, it is necessary to cover the period until the company's growth rates stabilize, and in order to achieve the greatest accuracy of the final results, the forecasting period can be divided into smaller intermediate periods of time, for example, six months.
In general terms, the value of an enterprise is determined by summing the income flows from the activities of the enterprise in the forecast period, previously adjusted to the current price level, with the addition of the value of the business in the post-forecast period (terminal value).
The two most common methods for assessing the income approach - income capitalization method and discounted cash flow method. They are based on estimated discount and capitalization rates that are used to determine the present value of future earnings. Of course, within the framework of the income approach, many more varieties of methods are used, but basically all of them are based on discounting cash flows.
The purpose of the assessment itself and the intended use of its results play an important role in the choice of assessment method. Other factors also influence, for example, the type of enterprise being assessed, the stage of its development, the rate of change in income, the availability of information and the degree of its reliability, etc.
Methodcapitalizationincome(Single-Period Capitalization Method, SPCM)
The income capitalization method is based on the assumption that the market value of an enterprise is equal to the present value of future income. It is most appropriate to apply it to those companies that have already accumulated assets, have a stable and predictable current income, and its growth rates are moderate and relatively constant, while the current state gives a known indication of long-term trends in future activities. And vice versa: at the stage of active growth of the company, in the process of restructuring or at other times when there are significant fluctuations in profits or cash flows (which is typical for many enterprises), this method is undesirable for use, since it is likely to get an incorrect result of valuation.
The method of capitalization of income is based on retrospective information, while for the future period, in addition to the amount of net income, other economic indicators are extrapolated, for example, the capital structure, the rate of return, the level of risk of the company.
The valuation of an enterprise using the income capitalization method is carried out as follows:
Current market value = DP (or P net) / Capitalization rate,
where DP - cash flow;
P is clean - net profit.
Note! The reliability of the valuation result depends very much on the capitalization rate, so special attention should be paid to the accuracy of its calculation.
The capitalization rate allows you to convert the values of profit or cash flow for a specific period of time into a measure of value. As a rule, it is derived from the discount factor:
Capitalization rate =D– T r,
where D- discount rate;
T p - the growth rate of cash flow or net profit.
It is clear that the capitalization ratio is often less than the discount rate for the same company.
As can be seen from the presented formulas, depending on what value is capitalized, the expected growth rate of cash flow or net profit is taken into account. Of course, for different types of income, the capitalization rate will vary. Therefore, the primary task in the implementation of this method is to determine the indicator that will be capitalized. In this case, income can be predicted the year following the valuation date, or the average income calculated using historical data is determined. Since the net cash flow fully takes into account the operating and investment activities of the enterprise, most often it is used as the basis for capitalization.
So, the capitalization rate in its economic essence is close to the discount factor and is strongly interconnected with it. The discount rate is also used to bring future cash flows to the present.
Discounted cash flow method ( Discounted Cash-Flows, DCF )
The discounted cash flow method allows you to take into account the risks associated with obtaining the expected income. The use of this method will be justified when a significant change in future income is predicted, both up and down. In addition, in some situations only this methodis applicable, for example, expanding the operation of an enterprise if, at the time of the assessment, it is not operating at full production capacity, but intends to increase it in the near future;planned increase in output; business development in general; merger of enterprises; introduction of new production technologies, etc. InUnder such conditions, annual cash flows in future periods will not be uniform, which, of course, makes it impossible to calculate the company's market value using the income capitalization method.
For new businesses, discounted cash flow is also the only option to use, as the value of their assets at the time of valuation may not match their ability to generate income in the future.
Of course, it is desirable that the company being assessed has favorable development trends and a profitable business history. For companies that suffer systematic losses and have a negative growth rate, the discounted cash flow method is less suitable. Particular care must be taken when evaluating enterprises with a high probability of bankruptcy. In this case, the income approach is not applicable at all, including the income capitalization method.
The discounted cash flow method is more flexible becausecan be used to evaluate any operating enterprise usingitemized forecast of future cash flows. It is important for the management and owners of the company to understand the impact of various management decisions on its market value, that is, it can be used in the process of cost management based on the obtained detailed business value model and see its susceptibility to the selected internal and external factors. This allows you to comprehend the activities of the enterprise at any stage. life cycle in future. And most importantly: this method is the most attractive for investors and meets their interests, since it is based on forecasts of future market development and inflationary processes. Although there is some difficulty in this, sincein an unstable crisis economy With predicting the flow of income for several years ahead is quite difficult.
So, the initial basis for calculating the value of a business by the methoddiscounted cash flowsis a forecast, the source of which is historical information about cash flows. The traditional formula for determining the present value of discounted future income is as follows:
Current market value = Cash flows for the periodt / (1 + D) t.
The discount rate is the interest rate required to bring future earnings to a single value of the present value of the business. For the investor, it is the required rate of return on alternative investment options with a comparable level of risk at the time of assessment.
Depending on the type of cash flow chosen (for equity or for total invested capital) used as the basis for valuation, the method for calculating the discount rate is determined. Cash flow calculation schemes forinvested and equity capital are presented in table. 12.
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Table 1. Cash flow calculation for invested capital |
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Index |
Impact on bottom line cash flow (+/-) |
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Net profit | |
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Accrued depreciation | |
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Decrease in own working capital | |
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Increasing own working capital | |
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Sale of assets | |
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Capital investments | |
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Cash flow for invested capital | |
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Table 2. Cash flow calculation for equity |
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Index |
Impact on bottom line cash flow (+/-) |
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Net profit | |
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Accrued depreciation | |
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Decrease in own working capital | |
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Increasing own working capital | |
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Sale of assets | |
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Capital investments | |
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Increase in long-term debt | |
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Reducing long-term debt | |
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Cash flow for equity | |
As you can see, the calculation of cash flow forequity differs only in that the result obtained by the algorithm for calculating the cash flow for invested capital is additionally adjusted for changes in long-term debt. Then the cash flow is discounted in accordance with the expected risks, which are reflected in the discount rate calculated in relation to a particular enterprise.
So, the cash flow discount rate for equity will be equal to the required rate of return on invested capital required by the owner,invested capital- the sum of weighted rates of return on borrowed funds (that is, the bank's interest rate on loans) and on equity, while their shares are determined by the shares of borrowed and equity funds in the capital structure. Cash flow discount ratefor invested capitalcalled weighted average cost of capital, and the corresponding method of its calculation -weighted average cost of capital (WeightyAVerageCost ofCapital, WACC). This method of determining the discount rate is most commonly used.
Besides, to determine the cash flow discount rate for equity may apply the following are the most common ways:
- capital asset pricing model ( CAPM);
- modified capital asset valuation model ( MCAPM);
- cumulative construction method;
- excess profit model ( EVO) and etc.
Let's consider these methods in more detail.
Methodweighted average cost of capital ( WACC)
It is used to calculate both own and borrowed capital by constructing the ratio of their shares, it shows not the balance sheet, butmarket value of capital. The discount rate for this model is determined by the formula:
DWACC = C zk × (1 - N prib) × D zk + C pr × D priv + C oa × D about,
where C zk - the cost of borrowed capital;
N prib - income tax rate;
D zk - the share of borrowed capital in the capital structure of the company;
С pr - the cost of raising equity capital (preferred shares);
D priv - the share of preferred shares in the capital structure of the company;
C oa - the cost of raising equity capital (ordinary shares);
D about - the share of ordinary shares in the capital structure of the company.
The more the company attracts cheap borrowed funds instead of expensive equity capital, the smaller the value WACC. However, if you want to use as much cheap borrowed funds as possible, you should also remember about the corresponding decrease in the liquidity of the company's balance sheet, which will certainly lead to an increase in lending interest rates, since this situation is fraught with increased risks for banks, and the value WACC will, of course, grow. Thus, it would be appropriate to use the “golden mean” rule, optimally combining equity and borrowed funds based on their balance in terms of liquidity.
Methodestimatescapitalassets (Capital Asset Pricing Model, CAPM)
Based on the analysis of stock market information on changes in the yield of freely traded shares. In this case, when calculating the discount rate for equity, the following formula is used:
DCAPM = D b / r + β × (D r − D b/r ) + P 1 + P 2 + R,
where D b / r - risk-free rate of return;
β - special coefficient;
D r - total profitability of the market as a whole (average market portfolio of securities);
P 1 - premium for small enterprises;
P 2 - premium for the risk characteristic of an individual company;
R- country risk.
The risk-free rate is taken as a basis for assessing the various types of risk associated with investing in a company. Special beta coefficient ( β ) represents the amount of systematic risk associated with the economic and political processes taking place in the country, which is calculated on the basis of deviations in the total return of the shares of a particular company compared to the total return of the stock market as a whole. The overall market return is the average market return index, which is calculated by analysts based on a long-term study of statistical data.
CAPMquite difficult to apply in the conditions of the underdevelopment of the Russian stock market. This is due to problems in determining the beta coefficients and the market risk premium, especially for closed enterprises, whose shares are not listed on the stock exchange. In foreign practice, the risk-free rate of return, as a rule, is the rate of return on long-term government bonds or bills, since it is believed that they have a high degree liquidity and a very low risk of insolvency (the probability of state bankruptcy is practically excluded). However, in Russia, after some historical events, government securities are not psychologically perceived as risk-free. Therefore, the average rate on long-term foreign currency deposits of the five largest Russian banks, including Sberbank of Russia, which is formed mainly under the influence of domestic market factors, can be used as a risk-free rate. As for the coefficients β , then abroad most often they use ready-made publications of these indicators in financial directories calculated by specialized firms by analyzing the statistical information of the stock market. Appraisers usually do not need to independently calculate these coefficients.
Modified capital asset valuation model ( MCAPM)
In some cases, it is better to use a modified capital asset valuation model ( MCAPM), which uses such an indicator as a risk premium, which takes into account the non-systematic risks of the enterprise being valued. Unsystematic risks (diversifiable risks)- these are risks that arise randomly in the company, which can be reduced through diversification. In contrast, systematic risk is due to the general movement of the market or its segments and is not associated with a specific security. Therefore, this indicator is more suitable for the Russian conditions for the development of the stock market with its characteristic instability:
DMCAPM = D b/r + β × (D r − D b/r ) + P risk,
where Db/r is the risk-free rate of return on Russian domestic foreign currency loans;
β - coefficient, which is a measure of market (non-diversifiable) risk and reflects the sensitivity of changes in the profitability of investments in companies in a particular industry to fluctuations in the profitability of the stock market as a whole;
D r - profitability of the market as a whole;
P risk is a risk premium that takes into account the non-systematic risks of the company being valued.
Cumulative Method
It takes into account various types of investment risks and involves an expert assessment of both general economic and industry-specific and specific enterprise factors that give rise to the risk of shortfall in planned income. The most important factors are the size of the company, structure finance, production and territorial diversification,quality of management, profitability, predictability of income, etc.The discount rate is determined based on the risk-free rate of return, to which is added additional premium for the risk of investing in this company, taking into account these factors.
As you can see, the cumulative approach is somewhat similar to CAPM, since they are both based on the rate of return on risk-free securities with the addition of additional income associated with the risk of investing (it is believed that the greater the risk, the greater the return).
Olson model (Edwards - Bell - Ohlson valuation model , EVO ), or the method of excess income (profit)
It combines the components of income and cost approaches, minimizing their shortcomings to some extent. The value of the company is determined by discounting the flow of excess income, that is, deviating from the industry average, and the current value of net assets. The advantage of this model is the ability to use for the calculation of available information on the value of the values available at the time of valuation. A significant share in this model is occupied by real investments, and only residual profit is required to predict, that is, that part of the cash flow that really increases the value of the company. Although this model is not without some difficulties in use, it is very useful in developing an organization's development strategy related to maximizing the value of the business.
Derivation of the final company's market value
After the preliminary value of the business is determined, a number of adjustments must be made to obtain the final market value:
- on excess/lack of own working capital;
- on non-core assets of the enterprise;
- on deferred tax assets and liabilities;
- on net debt, if any.
Since the calculation of the discounted cash flow includes the required amount of own working capital associated with the revenue forecast, then if it does not match the actual value, the excess of own working capital must be added, and the disadvantage must be subtracted from the value of the preliminary cost. The same applies to non-performing assets, since only those assets that were used in the formation of cash flow participated in the calculation. This means that if there are non-core assets that have a certain value that is not included in the cash flow, but can be realized (for example, upon sale), it is necessary to increase the preliminary value of the business by the value of the value of such assets, calculated separately. If the value of the enterprise was calculated for the invested capital, then the resulting market value refers to the entire invested capital, that is, it includes, in addition to the cost of equity, the value of the company's long-term liabilities. This means that in order to obtain the cost of equity, it is necessary to reduce the value of the established value by the amount of long-term debt.
After making all the adjustments, the value will be obtained, which is the market value of the company's equity capital.
The business is able to generate income even after the end of the forecast period. Incomes should stabilize and reach a uniform long-term growth rate. To calculate the cost inpost-forecast period, you can use one of the following discount calculation methods:
- by salvage value;
- by net asset value;
- according to the Gordon method.
When using the Gordon model, the terminal value is defined as the ratio of cash flow for the first year of the post-forecast period to the difference between the discount rate and the long-term growth rate of cash flow. The terminal value is then reduced tocurrent cost indicators at the same discount rate that is used to discount the cash flows of the forecast period.
As a result, the total value of the business is determined as the sum of the current values of income streams in the forecast period and the value of the company in the post-forecast period.
Conclusion
In the process of assessing the value of a company using an income approach, a financial model of cash flows is created, which can serve as a basis for making informed management decisions, optimizing costs, analyzing opportunities to increase design capacity and diversification of the volume of products. This model will continue to be useful after the evaluation.
To choose one or another method for calculating the market value, first of all, you need to decide on the purpose of the assessment and the planned use of its results. Then you should analyze the expected change in the company's cash flows in the near future, consider the financial condition and development prospects, as well as assess the economic environment, both global and national, including the industry. When the market value of a business needs to be known due to lack of time, or to confirm the results obtained using other approaches, or when in-depth cash flow analysis is not possible or required, the capitalization method can be used to quickly obtain a relatively reliable result. In other cases, especially when the income approach is the only possible to calculate market value, the discounted cash flow method is preferred. Perhaps, in certain situations, both methods will be needed to calculate the value of a company at the same time.
And of course, do not forget that the value obtained using the income approach directly depends on the accuracy of the analyst's long-term macroeconomic and industry forecasts. However, even the use of rough forecasts in the income approach process can be useful in determining a company's estimated value.
1. When analyzing expenses in the discounted cash flow method, one should take into account:
a) inflation expectations for each category of costs;
b) prospects in the industry, taking into account competition;
c) interdependencies and trends of past years;
d) the expected increase in product prices;
2. The value of a property, considered as the total value of the materials it contains, less the cost of disposal, is:
a) replacement cost;
b) the cost of reproduction;
c) book value;
d) investment cost;
e) disposal cost.
3. Does the size of the enterprise affect the level of risk:
a) yes;
b) no.
4. The appraiser indicates the date of the object appraisal in the appraisal report, guided by the principle:
a) compliance;
b) utility;
c) marginal productivity;
d) changes in value.
5. The "presumed sale" method is based on the following assumptions:
a) in the residual period, the depreciation and capital investments are equal;
b) in the residual period, stable long-term growth rates should be maintained;
c) the owner of the enterprise does not change.
6. Which method will give more reliable data on the value of an enterprise if it has recently emerged and has significant tangible assets:
a) salvage value method;
c) income capitalization method.
7. If the discounted cash flow method uses debt-free cash flow, then investment analysis examines:
a) capital investments;
b) own working capital;
c) change in the balance of long-term debt.
8. What is the capital market method based on:
a) on the evaluation of minority stakes in peer companies;
b) on the evaluation of controlling stakes in companies-analogues;
c) on the company's future earnings.
9. Which of the following methods is used to calculate the residual value for a going concern:
a) the Gordon model;
b) the "presumed sale" method;
c) by the value of net assets;
10. For a debt-free cash flow, the discount rate is calculated:
c) using the capital asset valuation model;
d) b, c.
11. Is the statement true: for the case of a stable level of income for an unlimited time, the capitalization ratio equal to the rate discounting?
a) yes;
b) no.
12. When the growth rate of the enterprise is moderate and predictable, then the following is used:
a) discounted cash flow method;
b) income capitalization method;
c) net asset method.
13. What method can be used to determine the value of a non-controlling stake:
a) the method of transactions;
b) the net asset value method;
c) the capital market method.
14. Transformation of reporting is mandatory in the process of assessing an enterprise:
a) yes;
b) no.
15. For cash flow to equity, the discount rate is calculated:
a) as the weighted average cost of capital;
b) the method of cumulative construction;
c) using the capital asset valuation model.
16. Whether the appraiser needs to analyze financial condition enterprises:
a) yes;
b) no.
17. In determining the market value, the market should be understood as:
a) a specific seller and buyer of similar types of enterprises;
b) all potential sellers and buyers of such types of enterprises.
18. Shares valued at market value are almost always:
a) a controlling stake;
b) a minority stake.
19. What components does the investment analysis include for calculations under the cash flow model for equity:
a) investment;
b) increase in own working capital;
c) demand for products.
20. Is the statement true: for cases of increasing cash flows over time, the capitalization ratio will always be greater than the discount rate:
a) yes;
b) no.
21. The multiplier is the ratio between the sale price and some financial indicator:
a) yes;
b) no.
22. Business is:
a) the enterprise as a whole;
b) an enterprise with branches and subsidiaries;
c) a specific activity organized within a specific structure.
24. Normalization of reporting is carried out in order to:
a) bringing it to the unified accounting standards;
b) determination of income and expenses characteristic of a normally operating business;
c) streamlining financial statements.
25. The calculation of the residual value is necessary in:
a) the capital market method;
b) the method of excess profits;
c) discounted cash flow method.
