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Assessment methods and method selection
Basics of asset valuation, factors that should be considered when selecting valuation methods: Valuation purpose and value type assess target Conditions for applicability of assessment methods Assess the quantity and quality of data on which the method is applied Other factors influencing the choice of assessment method
Edited at 2023-07-27 16:10:36
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Assessment methods and method selection
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- Outline
Assessment methods and method selection
market law
Prerequisites
active market
The comparable reference object of the evaluation object has an open market and active transactions, and the reference object market should be an efficient market.
information available
Necessary information about the transaction can be obtained
The basic steps
1. Select a reference object
2. Select comparison factors between the evaluation object and the reference object
3. Comparison of indicators and quantitative differences
4. Analyze and determine the differences between quantified comparison indicators
5. Preliminarily determine the assessment results
Comparable factors for market approach
single asset
Asset function
Physical characteristics and quality of assets
market conditions
transaction terms
Specific comparable factors
real estate
location factors
mechanical equipment
Technical content, manufacturer, specifications and models, production capacity, production efficiency
Corporation value
Industry Standard
financial standards
Common specific assessment methods
direct comparison method
current market price method
Objects and references have current prices
market price discount method
Based on the price of the reference object, the price is adjusted taking into account differences in transaction activity, sales conditions, sales methods, etc.
functional value analogy
Based on the transaction price of the reference object, adjustments will be made taking into account the functional differences between the object and the appraisal object.
price index method
The impact of price changes on the asset value caused by the time interval between the transaction time of the reference object and the valuation base date of the valuation object
Same applies to cost method
Newness Rate Price Adjustment Method
Based on the price of the reference object, consider the difference in condition between the evaluation object and the reference object, and adjust it through the newness rate.
market selling price analogy
Based on the price of the reference object, consider the differences in functions, market conditions, sales time, etc. between the reference object and the appraisal object, and adjust the price of the appraisal object through comparative analysis and quantitative differences.
value ratio method
Use the ratio of the transaction price of the reference object to a certain economic parameter or economic indicator to seat the multiplier or multiple
Mainly used to assess corporate value
Profitable
EBITDA value ratio
EBIT Value Ratio
after-tax cash flow value ratio
Earnings per share value ratio
Income category
sales to value ratio
Earnings per share ratio
Asset class
net asset value ratio
total asset value ratio
other
Technician Value Ratio
Mine recoverable reserve value ratio
Warehousing capacity value ratio, etc.
Application in enterprise value assessment
Listed Company Comparative Method
transaction case comparison method
indirect comparison method
Scope and limitations of application
Scope of application
Assets with active public markets and comparable transactions
used to assess corporate value
Advantages and Disadvantages of Market Law
advantage
It has an objective approach and is easier to be understood and accepted by both parties to the transaction.
If there is no serious deviation in the cost and utility of the asset and the market's perception of its value, it is usually the more effective, understandable and objective method among the three methods.
deficiencies and processing
The market's perception and reaction to the overall asset value of a company will still be affected by irrational factors
Pay attention to the differences in risks and returns between comparable cases and appraisal objects, grasp the differences between current market prices and asset values, and avoid replacing value with price
On the basis of analyzing the inherent differences between market perception and value, we reasonably adjust value multipliers and other related factors to obtain the estimated value of the assets to be valued.
Income Approach
time value of money
The difference in value of monetary capital at different points in time
It comes from the value appreciation after currency enters the society and the production process
Compound interest future value and present value coefficient
The present value of compound interest and the future value coefficient of compound interest are reciprocals of each other
Annuity future value and annuity present value coefficient
The future value of an ordinary annuity and the present value coefficient of an ordinary annuity are not reciprocal to each other
Future value of prepaid annuity = future value of ordinary annuity * (1 R)
Present value of prepaid annuity = present value of ordinary annuity * (1 R)
The future value of an ordinary annuity and the sinking fund coefficient are reciprocal of each other
Prerequisites for application
Three basic elements involved
The expected return of the valuation object
Discount rate or capitalization rate
The duration of expected benefits for the evaluation object
Necessary prerequisites
Future earnings can be reasonably expected and measured in monetary terms
The risk corresponding to the expected return can be measured
The income period can be determined or reasonably expected
Main parameters of the income approach
Methods for predicting future returns on assets
time series method
factor analysis
An indirect method of predicting returns
Discount Rate
Essentially a return on investment
risk free rate of return
risk reward ratio
How to determine the discount rate
Additive method
CAPM model
f
risk-free reward
Rm
average market return
Rm-Rf
The market average risk reward rate is also called the market risk premium.
β
Risk coefficient
Enterprise specific risk adjustment coefficient
Rs.
Generally used when calculating the discount rate of unlisted companies being evaluated, it is an indicator to measure the risk difference between the company being evaluated and comparable listed companies.
weighted average cost of capital
income period
indefinitely
Limited period
Main technical methods of income method
The arithmetic progression is increasing and the income period is unlimited.
A is the income in the first year, B is the annual increment
The arithmetic progression is decreasing and the income period is infinite.
A is the income in the first year, B is the decrease every year
When the arithmetic progression is increasing and the income period is limited
=A*Annuity present value coefficient B/R*Annuity present value coefficient-N*B/R*Compound interest present value coefficient
The arithmetic progression is decreasing and the income period is limited.
=A*annuity present value coefficient-B/R*annuity present value coefficient N*B/R*compound interest present value coefficient
proportional series increasing
The proportional series increases and the income period is limited.
Decreasing proportional series
Decreasing proportional series, limited income period
The scope and limitations of the income method
Scope of application
Individual asset valuation
intangible assets
Patents and proprietary technologies, copyrights, trademarks, customer relations, franchise rights, etc.
real estate
Profitable properties such as shops, hotels, and office buildings
mechanical equipment
Production lines and complete sets of equipment that can be rented or can independently generate cash flow
other
Unlisted stocks, bonds, long-term receivables, long-term equity investments, investment real estate
Business Valuation
The income method can better reflect the essential characteristics of the existence and operation of the enterprise.
Asset-light enterprise value assessment
Note that the returns are consistent with the discount rate
limitations
Applicable to
Asset costs and profitability are asymmetrical
Costs cannot or are difficult to accurately measure
There are intangible resource assets and assets with earning power
limitation
Assets that have no income or whose income cannot be measured in currency and whose risk-return rate cannot be calculated cannot be used.
Contains a certain degree of subjectivity, and the evaluation results are difficult to grasp
Certain market conditions are required, otherwise there will be difficulties in selecting some data.
cost method
concept
The basic idea
Rebuild or reset the evaluation object
Brand new = all expenses incurred to rebuild Necessary reasonable profit
Not brand new = replacement cost - physical depreciation - functional depreciation - economic depreciation
wear and tear of assets
Not equivalent to accounting depreciation
Prerequisites for application
Can be used normally or in use
Can be obtained through reset
Replacement costs and associated depreciation can be reasonably calculated
Basic steps and basic parameters
The basic steps
1. Determine the evaluation object and replacement cost
2. Determine the service life
3. Calculate various losses or depreciation amounts
4. Calculate the value of the appraisal object
The main parameters
replacement cost
Restoration replacement cost
An exact copy of a brand new appraised asset
Same: materials, construction or manufacturing standards, design, specifications and technology, etc.
Different: replacement cost: current price, assessed asset: current market price of the building
Update replacement cost
Emphasis on reset with the same function
Not identical: materials, construction or manufacturing standards, design, specifications and technology, etc.
Different: replacement cost: current price, assessed asset: current market price of the building
substantial devaluation
tangible loss
Loss or degradation of physical properties caused by use or natural forces
physical depreciation rate
functional depreciation
Losses caused by relatively backward asset functions caused by technological progress
economic devaluation
Caused by changes in external conditions
Decreased asset utilization and idleness
Operating income from assets decreases
How to estimate each parameter
replacement cost
Reset accounting method
Calculate the cost items required to reacquire the asset item by item and then add them up to obtain the replacement cost of the asset.
Purchasability
Self-built
Consideration of reasonable income
It should be determined based on the average asset income level of the industry in which the developer or manufacturer operates.
It can be either restoring the replacement cost or updating the replacement cost.
Taking into account price fluctuation factors, production technology factors, labor productivity, etc.
price index method
Adjust historical cost to replacement cost using an index of price changes associated with the asset
Applicable conditions
Unable to obtain current market value for appraisal objects in brand new condition
It is also impossible to obtain the current market price of reference objects similar to the subject of evaluation.
Calculated to restore replacement cost
Only price changes are considered
functional value analogy
Linear
production capacity ratio method
Find a reference that is the same or similar to the object of evaluation
Estimated based on the replacement cost of the reference object and the ratio of the reference object to the production capacity of the assessment object
nonlinear
Economies of scale index method
my country does not yet have unified data
Use with caution
Estimate of physical depreciation of assets
tangible loss
Calculation formula
Observation
Engineering and technical personnel with professional knowledge and rich experience conduct on-site inspections, determine the newness rate, and estimate physical depreciation.
Use life method
Use the actual age and total age of the wallpaper to determine the physical depreciation rate and estimate the physical depreciation.
asset utilization
Measures of workload other than time
Total designed workload vs. actual completed workload
Designed mileage and actual mileage traveled
Renovated equipment
Calculate the weighted update cost first, and then calculate the weighted average service life.
cost of repair method
Use the amount of expenses required to restore the asset's functionality to directly estimate the physical depreciation of the asset.
Repairable
Calculated based on the amount of direct expenditure
Not repairable
Determined by observation method and service life method
Estimate of functional depreciation of assets
excess investment costs
Type 1 functional depreciation
Restore Replacement Cost - Update Replacement Cost
Update replacement cost without taking into account functional depreciation
Operational functional depreciation
The second type of functional depreciation
1. Excess operating costs = operating costs of the valuation object - comparison case operating costs
2. Estimated remaining life
3. Determine the appropriate discount rate
4. Determine functional depreciation by discounting it within the remaining life.
Estimate of economic depreciation of assets
indirect calculation method
Economic depreciation due to reduced asset utilization
Economic devaluation caused by overcapacity
direct calculation method
Economic depreciation due to reduced income
Scope of application of cost method
Intangible assets without profitability
Intangible assets in their early stages
Newly registered trademark not used for any goods
Unable to reflect the potential benefits that the assessed object can bring
When used in enterprise value assessment, it evaluates the actual value of each identifiable asset and liability item by item, and ultimately determines the enterprise value.
Enterprise value is difficult to directly provide value reference for investors
The results obtained by the cost method valuation of asset-light enterprises are very different from those obtained by the income method and the market method.
The cost method is not completely meaningless in the evaluation of corporate mergers and acquisitions.
Choice of assessment method
Factors to consider
Valuation purpose and value type
assess target
Conditions for applicability of assessment methods
Assess the quantity and quality of data on which the method is applied
Other factors influencing the choice of assessment method
Situations in which an assessment method may be used
Requirements or restrictions of relevant laws, administrative regulations, and rules
The evaluation object only meets the applicable conditions for one evaluation method
due to operating conditions
Analyze the suitability of existing assessment methods and select only one assessment method
Disclosure of Valuation Method Selection
If a valuation method is selected due to limited applicability, the reasons why other basic valuation methods are not applicable should be disclosed in the asset valuation report
If a valuation method is selected due to restricted operating conditions, the analysis, explanation and disclosure of the restricted operating conditions should be included in the asset valuation report.