Set 4 FI 20 Valuations: Tangible and Intangible Assets

Question 1

define value in use

Answer 1

the value of the asset if continued to be used in it’s current format

Question 2

define highest and best value

Answer 2

the highest amount to be received for an asset based upon it’s optimal usage. must be possible, legal and financially feasible.

Question 3

define liquidation value

Answer 3

net proceeds received by an owner for an asset as a result of voluntary liquidation or reorganization. net of any disposal costs.

Question 4

three approaches to asset valuation

Answer 4

replacement cost - used when no cash flows
income-based - should be used when cash flows expected or already generated
market-based - used if reliable

Question 5

under replacement cost method, are current or historical costs used?

Answer 5

current

Question 6

what costs are included?

Answer 6

DM and DL costs
operating and admin overheads
indirect costs such as the cost of consultants, subcontractors, marketing research, engineering and architectural fees, legal fees, registration fees, and construction levies and permits
contracter’s profit assuming an outside firm would construct the asset
adjustments for obsolescence due to physical dep, functional or tech dep, or economic dep
opportunity costs related to investment in time or delaying development
benefit from tax savings

Question 7

land vs building - how is land measured?

Answer 7

market-based approach

Question 8

two other methods of valuing building

Answer 8

• cost per square foot

- comparable cost for a recent similar development

Question 9

uses/strengths

Answer 9

information to assess value generally available for tangible assets
can be used for internal intangibles, which do not generate economic inflows

Question 10

drawbacks

Answer 10

rarely does value equal economic benefit

Question 11

discounted capitalized earning approach - what?

Answer 11

PV of operating income used to determine value

Question 12

how is net operating income estimated?

Answer 12

1. estimate operating income
2. deduct rental vacancies or bad debt expense
3. deduct annual operating costs such as maintanence, utilities and property tax.

Question 13

how is capitalization rate determined?

Answer 13

To determine asset value, one of the following methods is employed:

• If it is assumed that the asset has an indefinite life, with stable operating income, apply a capitalization rate (which reflects the risk and terminal growth rate at the time of the valuation) to an estimate of annual net adjusted operating income. Real property is often assumed to have an indefinite life.
• If the property is assumed to have a finite life, prepare a forecast of adjusted earnings for a future period and then apply a discount rate to determine the discounted present value of the forecasted net operating income.
• If an asset has an indefinite life, but the operating income is volatile, then a forecast of adjusted earnings is prepared for the volatile period that is discounted. Once stability is achieved, a capitalization rate can be used for the remaining periods.

Question 14

discounted/capitalized earnings approach for intangibles

Answer 14

calcuate PV of the excess earnings net of any contributory assets, attributable to the intangible.