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1 – 10 of 892The increasing complexity of investment properties has necessitated the application of more advanced valuation and analysis techniques. Following the property cycle of the…
Abstract
The increasing complexity of investment properties has necessitated the application of more advanced valuation and analysis techniques. Following the property cycle of the 1980s/1990s, and the recommendations of several reporters, the DCF method has been promoted in Australia for certain income‐producing properties. The Australian Property Institute disseminated an information paper in 1993 that discussed DCF and suggested a performance approach to its application. Following this, a practice standard was produced in 1996 that was highly prescriptive but which contained a number of confusing passages. With the benefit of hindsight, its publication was premature and it was withdrawn from circulation. A rewrite was commissioned and an exposure draft was circulated in early 1999. It has been prepared as a performance standard in which the valuer is called on to follow a method while disclosing the specifics. However, a number of considerations remain to be finalised, for example, the application of the term cash flow to net operating income, income after finance and income after finance and tax. The preparation of standards is an evolutionary process and the present coverage of the DCF practice standard reflects the market in which it applies.
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Karim Bennouna, Geoffrey G. Meredith and Teresa Marchant
The purpose of this article is to evaluate current techniques in capital budget decision making in Canada, including real options, and to integrate the results with similar…
Abstract
Purpose
The purpose of this article is to evaluate current techniques in capital budget decision making in Canada, including real options, and to integrate the results with similar previous studies.
Design/methodology/approach
A mail survey was conducted, which included 88 large firms in Canada.
Findings
Trends towards sophisticated techniques have continued; however, even in large firms, 17 percent did not use discounted cash flow (DCF). Of those which did, the majority favoured net present value (NPV) and internal rate of return (IRR). Overall between one in ten to one in three were not correctly applying certain aspects of DCF. Only 8 percent used real options.
Research limitations/implications
One limitation is that the survey does not indicate why managers continue using less advanced capital budgeting decision techniques. A second is that choice of population may bias results to large firms in Canada.
Practical implications
The main area for management focus is real options. Other areas for improvement are administrative procedures, using the weighted average cost of capital (WACC), adjusting the WACC for different projects or divisions, employing target or market values for weights, and not including interest expenses in project cash flows. A small proportion of managers also need to start using DCF.
Originality/value
The evaluation shows there still remains a theory‐practice gap in the detailed elements of DCF capital budgeting decision techniques, and in real options. Further, it is valuable to take stock of a concept that has been developed over a number of years. What this paper offers is a fine‐grained analysis of investment decision making, a synthesis and integration of several studies on DCF where new comparisons are made, advice to managers and thus opportunities to improve investment decision making.
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The purpose of this paper is to focus on valuation practices applied by analysts to derive target price forecasts in Asian emerging markets. The key objective of this study is to…
Abstract
Purpose
The purpose of this paper is to focus on valuation practices applied by analysts to derive target price forecasts in Asian emerging markets. The key objective of this study is to understand valuation model preference of analysts and to compare the predictive utility of target price forecasts derived through heuristics-driven price-to-earnings (PE) model and theoretically sound discounted cash flow (DCF) model.
Design/methodology/approach
Each research report in the sample of 502 research reports has been studied in detail to understand the dominant valuation model (PE or DCF) applied by analyst to derive target price forecasts. These research reports have been issued on stocks trading in seven emerging markets including India, Malaysia, Indonesia, Taiwan, Philippines, Korea and Thailand during a six-year period starting 2008. Standard OLS and logit regression analysis has been performed to derive empirical findings.
Findings
The study finds that lower regulatory and reporting standards prevailing in emerging markets have no significant bearing on analyst choice of valuation model (PE or DCF). Time-series analysis suggests that emerging market analysts did not rely upon the usage of DCF model and preferred PE model during and immediately after the financial crisis of 2008. Multivariate regression results show weak evidence that PE model produces better results than DCF model after adjusting for the complexities associated with analyzing emerging market equities. The results imply that PE model, to some degree, is better equipped to capture market moods and sentiment in dynamic emerging markets rather than theoretically sound DCF model.
Originality/value
Most past studies on valuation model practices have focused on developed markets and this study provides a fresh perspective on analyst valuation model practices and performance in a new institutional setting of Asian emerging markets. The marginally better predictive utility of PE model as compared to DCF model is possibly a feature limited to Asian emerging markets.
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This paper aims to demonstrate the practical application of real options analysis to the evaluation of multistage projects, using an example involving a commercial real estate…
Abstract
Purpose
This paper aims to demonstrate the practical application of real options analysis to the evaluation of multistage projects, using an example involving a commercial real estate development.
Design/methodology/approach
The approach demonstrated builds on static discounted cash flow (DCF) analysis and requires knowledge of only the binomial option pricing model.
Findings
Real options analysis can be implemented in a spreadsheet and only one parameter – the volatility of the price of the completed project – needs to be estimated in addition to those required for static DCF analysis. The approach described can be used to evaluate a project at any stage of development, which is especially useful when the suspension of partly completed projects is under consideration.
Originality/value
The paper shows how to carry out real options analysis of complex multistage development projects using straightforward valuation tools, making an important project evaluation technique more readily available to practitioners.
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Joe Anderson, James I. Hilliard, Josh Williams and Susan K. Williams
Josh Williams is a Student at the NAU who has driven buses on campus and wants to improve the transportation on campus. He is convinced that purchasing a new type of bus that is…
Abstract
Synopsis
Josh Williams is a Student at the NAU who has driven buses on campus and wants to improve the transportation on campus. He is convinced that purchasing a new type of bus that is more fuel efficient, has larger capacity, better designed for boarding, and has a longer life is worth the higher purchase cost. He sets out to prove it by creating a discounted cash flow (DCF) analysis. Since many of the estimates for the DCF analysis are uncertain, he decides to perform a Monte Carlo simulation (MCS) analysis. Students are asked to step into Josh’s role and perform the analysis.
Research methodology
Josh Williams was a Student in the authors’ MBA program. Both authors teach in this program and one author was the Advisor for Net Impact and worked with Josh to present his idea to the university administration. The authors have changed a name or two but otherwise, the case describes a real situation in a real organization without disguise.
Relevant courses and levels
The authors have used this case in a first semester MBA-Applied Management course, Decision Modeling and Simulation. Students already have experience with DCF analysis and have been introduced to MCS. With this case, students apply MCS at the conclusion of a three-week module on predictive analytics. Students have run at least two MCS models and have become comfortable with the software. The case would also be appropriate for a senior-level undergraduate course such as business analytics or management science. It might also be useful for other courses that include the MCS modeling technique learning objectives such as project management.
Theoretical bases
This case provides an opportunity for students to perform an MCS analysis. MCS is useful when many of the inputs to a DCF analysis (or any model) have been estimated and the modeler is concerned that the estimates are uncertain and could perhaps be a range of values. MCS can be used to understand the effect of this uncertainty on NPV which in turn may affect the decision. The case could also be used without MCS focusing just on the DCF analysis with deterministic sensitivity analysis.
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Advances an alternative method of analysing the market price ofleasehold investments for use when assessing the market price of acomparable investment. The method can be adapted…
Abstract
Advances an alternative method of analysing the market price of leasehold investments for use when assessing the market price of a comparable investment. The method can be adapted to evaluate investment worth by substituting rental growth forecasts for those implied by market price levels. Baum and Crosby highlighted the inadequacy of current dual rate valuation methods for leasehold investments and the problems associated with the contemporary approach. Their work is used as the basis for this article. A discounted cash flow (DCF) approach is developed using an analysis of target returns. The all risks yield (ARY) and target return are first assessed on the basis that the investment is freehold but otherwise identical. The implied annual growth rate in CRV is then calculated using the equated yield formula. It is then argued, that because this growth in CRV arises from the location and quality of the building, it is equally applicable to a leasehold interest in that building. This leaves only the target return for the leasehold interest to be established, for a DCF valuation to be possible. Market transactions in leasehold properties are analysed in terms of target return to illustrate how statistical evidence of market sentiment can be accumulated. This evidence is based on the “extra return” required for leasehold investments over comparable freeholds. It will be shown that this “extra return” requirement is not materially affected by the freehold target return initially selected in order to carry out the analysis. The method accordingly appears reliable.
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Spike Boydell and Stuart Gronow
The Australian Institute of Valuers and Land Economists Incorporated introduced a mandatory discounted cash flow practice standard on 1 September 1996. Reviews the new standard…
Abstract
The Australian Institute of Valuers and Land Economists Incorporated introduced a mandatory discounted cash flow practice standard on 1 September 1996. Reviews the new standard, highlighting the strengths and weaknesses. Offers early constructive commentary for the refinement of the standard at its 12‐month review. As no such mandatory “practice standard” has yet emerged from the US Appraisal Institute or the UK Royal Institution of Chartered Surveyors, it is reasonable to assume that these bodies as well as their membership will view the Australian initiative with interest.
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Bei Zeng, Andreas Johannesen and Xin Fang
This study aims to provide students an opportunity to analyze the financial performance of a publicly listed real estate company and estimate its instinct value by applying…
Abstract
Purpose
This study aims to provide students an opportunity to analyze the financial performance of a publicly listed real estate company and estimate its instinct value by applying appropriate financial models and approaches.
Theoretical basis
Three major valuation models/approaches generated by financial theory and practice to estimate the intrinsic value of a security: discounting cash-flows valuation (DCF and NPV) – valuation through adjusted net asset and liquidation value (NAV) – relative valuation through price and value multiples (valuation multiple analysis and precedent transactions analysis). Wholly owned subsidiaries versus and joint venture ones.
Research methodology
Analyze financial information of all segments in a multiple-business firm, and apply suitable financial models and approaches among net asset value model (NAV), discounted cash flow (DCF) or net present value (NPV) model, valuation multiple analysis and precedent transactions analysis to estimate the intrinsic value of the whole firm.
Case overview/synopsis
This decision-based case allows students to explore the business valuation process for a public listed real estate company, Alexander & Baldwin, Inc. (NYSE: ALEX). Based on financial statements analysis and forward-looking financial expectation on ALEX, this case elevates students' understanding and practice of valuating this multiple-business firms by applying appropriate financial models and approaches among NAV, DCF or NPV, valuation multiple analysis and precedent transactions analysis and enable students to make their investment decisions of buying, holding or selling the company’s stocks.
Complexity academic level
This case is most appropriate for graduate courses such as corporate finance, investments, personal finance, real estate finance and financial markets and institutes.
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Abdulkader Mostafa and Colin Anthony Jones
The UK experienced a substantial rise in owner occupation over the twentieth century, and many tenants still aspire to homeownership. These strong aspirations to own are…
Abstract
Purpose
The UK experienced a substantial rise in owner occupation over the twentieth century, and many tenants still aspire to homeownership. These strong aspirations to own are attributed to a set of financial and non-financial benefits. This paper aims to calculate, for the first time, the financial returns from buying versus renting in Britain for first-time buyers in 11 regions.
Design/methodology/approach
It applies a DCF approach based on historical housing and mortgage market data from 1975 to 2012.
Findings
The paper finds strong evidence that, in purely financial terms, buying has been always superior to renting in all regions of the UK over the period.
Practical implications
It gives a clear message of the financial benefits of homeownership over renting in Britain, even over very short time periods.
Originality/value
The paper is the first to apply a comprehensive DCF model to the choice between renting and owning.
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Marie Nilsson, Peter J. Harris and Russell Kett
Presents an evaluation of the theoretical context and practical application of different methods of hotel valuation, with particular emphasis on the methods related to the…
Abstract
Presents an evaluation of the theoretical context and practical application of different methods of hotel valuation, with particular emphasis on the methods related to the income‐generating capacity of a hotel. The findings reveal a wide range of variation and complexity between methods and that each method has benefits and limitations and requires adjustments and assumptions in different market conditions. However, it is concluded that the more sophisticated “income‐based” income capitalisation methods constitute the most effective basis for a framework on which to derive the open market value for a hotel as an ongoing business entity, but that one or more of the other main valuation approaches should be drawn on in order to effect the reconciliation of a hotel’s final value.