Income method formula. Income approach to real estate and business valuation. Application of the income approach

In our country, selling or renting real estate Lately is gaining momentum in commerce, resulting in the need for owners to clearly determine the value of their property. This is necessary in order to profitably sell or lease real estate in the future.

Today there is great amount organizations where qualified specialists will help you make the correct calculation. There are several methods for calculating this indicator, but recently the income approach to real estate valuation has been gaining popularity. What is its essence, features and advantages should be considered in more detail.

The essence of the technique

Income approach to the valuation of real estate is a procedure when the appraiser calculates the value of an object based on the possible future profit from it. That is, the owner of the building can receive from an expert a certain forecast of profitability from the property, and not just the dry value today. The income approach is suitable for valuation only in cases where the income and expenses from the property can be accurately predicted into the future. The entire procedure is carried out in several stages of the appraiser’s work.

To complete the process and produce the result, the specialist must:

  1. Precisely determine the time frame for the forecast to be issued. The fact is that after a certain time, the issued assessment becomes irrelevant due to the need to carry out repairs or other factors affecting the value of the property. All methods of the income approach must have a strictly established framework for its operation.
  2. Calculate possible profits and losses from real estate during the period of validity of the issued forecast and after its end.
  3. In accordance with the investment attributed to the property and taking into account the level of risk, calculate the discount rate. This is necessary for future comparison of the specialist’s assessment results and real profits.

A way to simplify the process

To make the income approach valuation method more understandable and simple for ordinary citizens, there are several options for simplifying it. To do this, the appraiser first needs to calculate several important indicators real estate, which in the future will only be substituted into ready-made formulas and produce the desired results.

Among them:

  • the amount of net benefit in case of sale of property;
  • gross income (in this situation is determined on the basis of tariffs and rates in force at the time of calculations);
  • actual (real) gross profit (calculated by subtracting from the gross income all possible losses from real estate; including possible non-payments from tenants, losses from incomplete use of objects, and so on);
  • discount rate;
  • correct calculation of all possible expenses.

To accurately determine all possible material losses for the last point, a specialist will need to divide them into several indicators and carry out calculations for each separately.

The income approach to real estate involves calculating:

  1. Fixed costs, including payments and deductions for the maintenance of the facility, which do not change over time. Often these include mortgage rates, tax payments, or property depreciation accounting.
  2. Operating costs are the costs of maintaining the facility. May change from time to time depending on the need to maintain the property in an attractive marketable condition.
  3. Unplanned expenses, including possible costs for urgent repairs or purchases.

Calculation methods

Most often, the following income approach methods are used to calculate the value of real estate:

  • direct capitalization method;
  • discounting method.

Each method has its pros and cons, as well as certain nuances, thanks to which various situations It is better to choose one specific method. To understand their features, it is necessary to consider each separately.

Capitalization of benefits

The income approach of this plan is most often used to calculate the value of a real estate property in the presence of a stable, good and long-term profit from it or in the case when the financial benefit from maintaining the property grows proportionally.

This income approach involves making calculations using a certain formula with two known ones. To obtain accurate data on the full value of the property, the appraiser needs the capitalization ratio and net operating income. The final price is determined by dividing the second indicator by the first, taken in both cases for one year. That is why stability of profit is important to obtain exact result.

Getting data for a method

In order for the income approach to calculating profit capitalization to be as close to reality as possible, it is necessary to accurately calculate all the necessary constants for substitution in the formula. Calculating net operating income can be done by subtracting operating expenses from actual gross income data other than property depreciation.

Cash flow discounting

The income approach is calculated using this method in the following cases:

  • if there is a large difference in profit in a certain period of time;
  • seasonality of profit from the facility;
  • if the building is still under construction or restoration;
  • if the real estate is a complex of buildings and not a single object.

It is more difficult to carry out calculations using this method, but it is applicable to most real estate in the country. The method includes determining the time period for the calculation and the expected profit or loss from the object during this period. For developed countries, experts most often take intervals of at least five years, and sometimes up to 10 years, but for the unstable Russian economy, indicators for 3-5 years, no more, will be more accurate. Calculation for a longer period will not reflect real indicators, and not every appraiser will undertake such work, considering it pointless.

Getting data for a method

Since this method is capable of determining the value of an object with inaccurate and unstable profit indicators from it, its calculation requires a larger number of constants to be substituted into the formula.

You need to determine:

  • potential (possible) gross income;
  • net operating income;
  • actual (real) gross income;
  • cash flow before and after taxes.

All available constants are substituted into the formula calculation of discounted cash flow :

PV=C i/(1+i) t + M * (1/(1+i) n) ,

where PV will be the result of all calculations, demonstrating the price of the object taking into account the entered indicators. Ci here represents the cash flows during a limited period of time, denoted by t, M is the residual value, and it is the discount rate of the property.

To make it easier for a person who has not previously encountered such calculations to understand the meaning of all actions, one should consider the income approach, an example of which will put everything in its place. So, let's consider a situation where the cash flow from owning real estate for the allotted time for calculation amounted to 200 thousand rubles, and the discount rate of the object is determined as 26% (in monetary equivalent it is 0.26 rubles). Based on these data, the property owner expects to receive an increase in profit by the end of the time allotted for the calculation by 4% (in the monetary equivalent of 0.004 rubles). It turns out that: PV=200/(0.26-0.004)=909.1 thousand rubles.

Positive aspects of the method

Among the advantages of the income approach, one should undoubtedly highlight the simplicity of calculations. This is actually true, because all the formulas for calculations have already been optimized and to get the result you just need to substitute your data into them. It is only important to provide them to the appraiser in accordance with the real ones, otherwise the result of the calculations will be incorrect.

The second advantage of the calculation method under consideration is its ability to reflect the real picture of the economy and the value of objects at a specific time, because to obtain a result the appraiser has to calculate a large number of indicators, taking into account all possible nuances of both the object itself and the market as a whole.

Restrictions on use

Mainly, only enterprises and property owners who have a stable and long-term income from their property can use this method of calculating value. That is, with a newly constructed building, it will be difficult to estimate its profit, because there are simply no initial data for the necessary calculations.

For the same reasons for the instability of indicators, the income comparative approach cannot be used to calculate during an economic crisis, which may short time radically change the market situation.

The whole essence of carrying out calculations comes down to the usual analysis of available data and drawing conclusions from them. If the appraiser does not have enough information to substitute into the formula, then making calculations immediately becomes impossible.

Grounds for refusal

Since the whole point of the income method of calculating the value of objects is to know all the data necessary for this, the lack of certain information may become a reason for the appraiser to refuse calculations. Also, the owner of the property can refuse the income approach by providing data in full, but not supported by documents, because the whole point of the calculation is to evaluate real information, from which conclusions are drawn in the future.

A specialist may refuse to carry out calculations using this approach for other reasons. For example, if the property is planned to be used for non-commercial purposes, which means that it will not be possible to receive benefits from it in the future. Another reason for refusal is often the unofficially developed rental market, based on oral agreements. This also leads to the fact that there is no confirmation of data collection, which means that the result of the calculations cannot be called accurate.

Additional calculation methods

The income calculation of the value of real estate can also be carried out through residual income. This method is a calculation of the difference between the actual profit and the one predicted at the time of purchasing a building or making calculations.

IN developed countries all methods of the income approach are gradually fading into the background, being replaced by option pricing. In our country, the method is not applicable due to the lack of basic indicators for substitution in the formula, but in other countries it allows you to calculate the value of real estate or business, even if they suffer visible losses, and proving that their price is not zero for any amount of debt.

Finally

Despite the ease of calculations when calculating the value of real estate using the income approach, it is gradually losing its relevance. This is due to the complexity of calculating the data necessary for the formula, because in order to obtain an accurate result, all of it must be truthful and correct. Any deviation or approximate calculation directly affects the final result of the method.

The method is not applicable for most situations due to the development of underground accounting in our country, which does not allow appraisers to obtain valid information about a certain object.

In general, the method is very effective and is capable of calculating the real value of any real estate, small or medium-sized business or large company, but the reliability of the information provided by employees can significantly affect the results of calculations from experts. This is why many appraisers are hesitant to carry out calculations using this approach.

But be that as it may, in order to make the correct calculation, it is best to contact a trusted company where real professionals work.


MINISTRY OF FINANCE OF THE RUSSIAN FEDERATION

FEDERAL STATE EDUCATIONAL INSTITUTION

HIGHER PROFESSIONAL EDUCATION

"ALL-RUSSIAN STATE TAX ACADEMY

MINISTRY OF FINANCE OF THE RUSSIAN FEDERATION"

Discipline: “Real Estate Valuation”

Income approach to real estate valuation

Completed by: Skorodumova O.Yu.

Specialty: taxes and taxation

Group: NZ - 401

Moscow 2009

Introduction

    Characteristics of the income approach

    Determination of net operating income

    Capitalization theory and capitalization ratios

    Direct capitalization

    Methods for calculating capitalization rates

    Discounting income stream

    Valuation using the residual technique

    PROS AND CONS OF USING THE INCOME APPROACH

Conclusion

Literature

Introduction

Currently, real estate is one of the necessary resources (along with human, financial, material, technical and information resources) to ensure the effective operation of a joint stock company, state and municipal owner and, finally, the normal life of each individual individual.

At the same time, real estate is the most important property component of the owners. According to its estimated value, real estate is up to 30-40% (of course, there are a number of modern areas of activity where real estate is used minimally, for example, in small businesses, in online stores, etc.)

Therefore, the assessment of real estate is important and relevant at the present stage of development. Valuation of movable property is also important both for taxation purposes and for the purposes of purchase and sale, pledge, lease, etc.

There are several methods for assessing real estate and other property of enterprises. Such as: income, comparative, cost and property approaches to the valuation of real estate and other property. In this paper, I discuss the income approach to real estate valuation, used to value income-producing real estate.

          CHARACTERISTICS OF THE INCOME APPROACH

The income method is based on the expectation principle, which states that the typical investor or buyer purchases real estate in anticipation of receiving future income or benefits from it, that is, it reflects:

    the quality and quantity of income that the property can generate over its life;

    risks both specific to the object being assessed and to the region.

Thus, the value of an asset can be defined as its ability to generate income in the future. The time factor operates here, and the amount of future income must be reduced to the zero point in time by capitalizing income and discounting.

The theoretical basis of the income approach is the principles of valuation, the most significant of which, as well as factors and circumstances, the analysis of which is based on the corresponding principles (Fig. 1)

Principle Sphere of Influence

EXPECTATIONS

(the basic principle on which income assessment is based)

Pricing factors

Income characteristics

Characteristics of capital

Odds

SUBSTITUTIONS

Selection and analysis of analogue objects

Analysis of alternative investments

SUPPLY AND DEMAND

Accounting and analysis of factors:

utility;

scarcity;

competitiveness;

accessibility of the capital market;

monopoly, state control,

business activity;

population characteristics

ULTIMATE PRODUCTIVITY

(balance, deposit)

Analysis of the property:

economic compliance of real estate elements;

its use and type of land use

The main advantage of the income approach compared to the market and cost approach is that it largely reflects the investor’s idea of ​​real estate as a source of income, that is, this quality of real estate is taken into account as the main pricing factor. The income approach to valuation is closely related to the market and cost approaches. For example, the rates of return used in the income approach are usually determined from an analysis of comparable investments; reconstruction costs are used in determining cash flow as additional investments; capitalization methods are used to adjust for differences between the market and cost approaches.

The main disadvantage of the income approach is that, unlike other approaches to valuation, it is based on forecast data.

Within the framework of the income approach, two methods can be used:

    direct capitalization of income;

    discounted cash flows.

The advantages and disadvantages of the methods are determined according to the following criteria (Fig. 2)

Criteria for comparing income approach methods

The ability to reflect the actual intentions of a potential buyer (investor)

The type, quality and breadth of information on which the analysis is based

Ability to take into account competitive fluctuations

Ability to take into account specific features object that affects its value

location

potential profitability

These methods are based on the premise that the value of real estate is determined by the ability of the property being valued to generate income streams in the future. In both methods, future income from a real estate property is converted into its value, taking into account the level of risk characteristic of this property. These methods differ only in the way they transform income streams.

When using income capitalization methods, income for one time period is converted into the value of real estate, and when using the discounted cash flow method, income from its proposed use for a number of forecast years, as well as proceeds from the pre-sale of a property at the end of the forecast period, are converted.

          DETERMINATION OF NET OPERATING INCOME

For rate full rights property and tenant rights, net operating income (NOI) is calculated as an income stream.

A real estate appraiser works with the following income levels:

Potential Gross Income (GPI)

Actual Gross Income (DVD)

Net operating income (NOI)

Potential gross income (GPI) is the income that can be received from real estate if it is used 100% without taking into account all losses and expenses. Potential gross income depends on the area of ​​the property being valued and the established rental rate and is calculated using the formula:

PVD= S x Ca

Where S is the area for rent, m2;

Ca - rental rate per 1m2

The rental rate depends on the location of the property, its physical condition, availability of communications, lease term, etc.

There are two types of rental rates (Fig. 3)

contractual



market


The market rent is the rate prevailing in the market for similar properties, and is the most likely rent that a typical landlord would be willing to rent and a typical tenant would be willing to lease the property, which is a hypothetical transaction. Market rental rates are used to value freehold ownership, where the property is essentially owned, operated and enjoyed by the owner himself: what would be the income stream if the property were rented out.

The contract rental rate is used to value the lessor's partial property rights. In this case, it is advisable for the appraiser to analyze lease agreements from the point of view of the terms of their conclusion.

According to the types of rental rates, lease agreements are divided into three large groups:

    with a fixed rental rate (used in conditions of economic stability);

    with a variable rental rate (revision of rental rates during the term of the contract is carried out, as a rule, in conditions of inflation);

    with an interest rate (when a percentage of the income received by the tenant as a result of the use of the leased property is added to the fixed amount of rental payments).

It is advisable to use the income capitalization method in the case of concluding an agreement with a fixed rental rate; in other cases, it is more correct to use the discounted cash flow method. To assessment real estateAbstract >> Economic theory

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    • The task of assessing the value of a business at different stages of its development does not lose its relevance. An 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.

    Most often, to assess the value of an enterprise, they use 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 investment, 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 income is relative and is subject to the enormous influence of probability, depending on the level of risk of possible investment failure, which must also be taken into account.

    Note! The fundamental cost factor when using this method is the company's expected future income, which represents certain economic benefits for the owners of the enterprise. The higher the company's income, the more, other equal conditions, its market value.

    The income method takes into account the main goal of the enterprise - making a profit. From these positions, it is most preferable for business assessment, as it reflects the prospects for the development of the enterprise and 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.

    Despite all the undeniable advantages, this approach is not without controversial and negative aspects:

    • it is quite labor intensive;
    • characteristic of him high level subjectivity when forecasting income;
    • there is a high proportion of probabilities and conventions, as various assumptions and restrictions are established;
    • great influence various factors risk on projected income;
    • it is problematic to reliably determine the real income shown by the enterprise in its reporting, and it is possible that losses are deliberately reflected for various purposes, which is associated with the opacity of information from domestic enterprises;
    • accounting for non-core and excess assets is complicated;
    • the assessment of unprofitable enterprises is incorrect.

    IN mandatory It is necessary to pay special attention to the ability to reliably determine the future income streams of the enterprise and the development of the company's activities at the expected pace. The accuracy of the forecast is also greatly influenced by the stability of the external economic environment, which is important 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 draw up a reliable forecast of income and expenses.

    Calculating the value of a company using the income approach

    Estimating the value of a business using the income approach begins with solving the following problems:

    1) forecast of future income of the enterprise;

    2) bringing the value of future income of the enterprise to the current moment.

    Correct solution of these problems contributes to obtaining adequate final results assessment work. Of great importance in the course of forecasting is the normalization of income, with the help of which one-time deviations are eliminated, appearing, 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, or the extrapolation method, which is an extension of existing trends.

    In addition, it is imperative to take into account the factor of changes in the value of money over time - the same amount of income currently has a higher price than in a future period. The difficult question of the most acceptable timing for forecasting a company's income and expenses needs to be resolved. It is believed that to reflect the inherent cyclical nature of industries, in order to make a reasonable forecast, it is necessary to 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, increasing the forecast period in proportion makes it more difficult to predict the values ​​of income and expenses, inflation and cash flows. Some appraisers note that the most reliable income forecast will be for 1–3 years, especially when there is instability in the economic environment, since as the forecast periods increase, the conditionality of the estimates increases. But this opinion is only true for sustainably operating enterprises.

    Important! In any case, when choosing a forecast period, you need to cover the period until the company’s growth rate stabilizes, and to achieve the greatest accuracy of the final results, you can divide the forecast period into smaller intermediate periods of time, for example, half a year.

    In general terms, the value of an enterprise is determined by summing up the income streams from the activities of the enterprise during 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 most common two methods for assessing the income approach are: 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 they are all based on discounting cash flows.

    A major role in choosing an assessment method is played by the purpose of the assessment itself and the intended use of its results. Other factors also have an impact, for example, the type of enterprise being valued, the stage of its development, the rate of change in income, the availability of information and the degree of its reliability, etc.

    Income capitalization method ( Single-Period Capitalization Method, SPCM)

    The income capitalization method is based on the proposition that the market value of a business is equal to the present value of future earnings. It is most appropriate to apply it to those companies that have already accumulated assets, have a stable and predictable amount of current income, and the rate of its growth is moderate and relatively constant, while the current state gives a certain idea of ​​\u200b\u200blong-term trends in future activities. And vice versa: at the stage of active growth of the company, during 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 there is a high probability of obtaining an incorrect value assessment result.

    The income capitalization method is based on retrospective information, while for a future period, in addition to the amount of net income, other economic indicators are extrapolated, for example, capital structure, rate of return, and the company’s risk level.

    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 is cash flow;

    P is clean - net profit.

    Note! The reliability of the assessment result very much depends on the capitalization rate, so special attention should be paid to the accuracy of its calculation.

    The capitalization rate allows you to convert earnings or cash flow values ​​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 r - growth rate of cash flow or net profit.

    It is clear that the capitalization ratio is most often less than the discount rate for the same company.

    As can be seen from the presented formulas, depending on what amount is capitalized, the expected growth rate of cash flow or net profit is taken into account. Of course, the capitalization rate will vary for different types of income. Therefore, the primary task when implementing this method is to determine the indicator that will be capitalized. In this case, income can be predicted for the year following the valuation date or determined the average size income calculated using historical data. Since net cash flow fully takes into account the operating and investment activities of an enterprise, it is most often used as a base for capitalization.

    So, the capitalization rate in its economic essence is close to the discount factor and is strongly interrelated with it. The discount rate is also used to reduce future cash flows to the present time.

    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 this method is exclusively applicable, for example, expanding the activities of an enterprise if, at the time of assessment, it does not operate at its full production capacity, but intends to increase it in the near future; planned increase in production volume; business development in general; mergers of enterprises; introduction of new production technologies, etc. In such conditions, annual cash flows in future periods will not be uniform, which, naturally, makes it impossible to calculate the market value of a company using the income capitalization method.

    For new enterprises, the only possible method to use is also the discounted cash flow method, since the value of their assets at the time of valuation may not coincide with the ability to generate income in the future.

    Of course, it is desirable that the enterprise being valued has favorable development trends and a profitable business history. For companies suffering systematic losses and having a negative growth rate, the discounted cash flow method is less suitable. Particular care must be taken when evaluating companies 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, as it can be used to value any operating enterprise using an item-by-item forecast of future cash flows. It is of no small importance for the management and owners of the company to understand the influence of various management decisions on its market value, that is, it can be used in the process of value management based on the resulting detailed business value model and see its susceptibility to selected internal and external factors. This allows you to comprehend the activities of the enterprise at any stage of the life cycle in the future. And most importantly: this method is most attractive to investors and meets their interests, since it is based on forecasts of future market development and inflationary processes. Although this also contains some difficulty, since in conditions of an unstable crisis economy it is quite difficult to predict the flow of income for several years in advance.

    So, the initial basis for calculating the value of a business using the discounted cash flow method is a forecast, the source of which is retroinformation about cash flows. The traditional formula for determining the current value of discounted future income is as follows:

    Current market value = Cash flows for the period t / (1 + D)t.

    The discount rate is the interest rate required to reduce future earnings to single meaning current business value. For an investor, it is the required rate of return on alternative investments with a comparable level of risk at the time of valuation.

    Depending on the type of cash flow chosen (equity or total invested capital) used as the basis for valuation, the method for calculating the discount rate is determined. Schemes for calculating cash flow for invested and equity capital are presented in table. 12.

    Table 1. Calculation of cash flow for invested capital

    Table 2. Calculation of cash flow for equity

    Index

    Impact on the bottom line cash flow (+/–)

    Net profit

    Accrued depreciation

    Decrease in own working capital

    Increase in own working capital

    Sale of assets

    Capital investments

    Increase in long-term debt

    Reducing long-term debt

    Cash flow for equity

    As you can see, the calculation of cash flow for equity capital differs only in that the result obtained from the algorithm for calculating 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 specific enterprise.

    So, the cash flow discount rate for equity capital will be equal to the 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 capital, while their specific weights are determined by shares of borrowed and equity funds in the capital structure. The cash flow discount rate for invested capital is called weighted average cost of capital, and the corresponding method for calculating it is weighted average cost of capital method(Weighted Average Cost of Capital, WACC). This method of determining the discount rate is used most often.

    In addition, the following most common methods can be used to determine the cash flow discount rate for equity:

    • capital asset valuation 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.

    Weighted average cost of capital method ( WACC)

    It is used to calculate both equity and borrowed capital by constructing the ratio of their shares; it shows not the book value, but the market value of capital. The discount rate for this model is determined by the formula:

    DWACC= S zk × (1 – N prib) × D zk + S pr × D pr + S oa × D ob,

    where C зк is the cost of borrowed capital;

    N profit - income tax rate;

    Дзк - share of borrowed capital in the company's capital structure;

    Ср - cost of attracting share capital (preferred shares);

    D pr - share of preferred shares in the company's capital structure;

    Соа - cost of attracting share capital (ordinary shares);

    D ob - the share of ordinary shares in the capital structure of the company.

    The more a company attracts cheap borrowed funds instead of expensive equity capital, the lower the value WACC. However, if you want to use as many cheap borrowed funds as possible, you should also remember about the corresponding decrease in the liquidity of the enterprise’s balance sheet, which will certainly lead to an increase in credit interest rates, since for banks this situation is fraught with increased risks, and the amount WACC, of course, will grow. Thus, it would be appropriate to use the “golden mean” rule, optimally combining own and borrowed funds based on their balance in terms of liquidity.

    Capital asset valuation method ( Capital Asset Pricing Model, CAPM)

    Based on the analysis of information from stock markets about changes in the profitability of publicly traded shares. IN in this case When calculating the discount rate for equity capital, the following formula is used:

    D CAPM= D b/r + β × (D r − D b/r) + P 1 + P 2 + R,

    where D b/r is the risk-free rate of return;

    β - special coefficient;

    D r - the total return of the market as a whole (the average market portfolio of securities);

    P 1 - bonus for small enterprises;

    P 2 - premium for risk specific to an individual company;

    R- country risk.

    The risk-free rate is used 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 economic and political processes, which is calculated based on the deviation of the total stock return of a particular company compared to the total return of the stock market as a whole. The total market return indicator is the average market return index, which is calculated by analysts based on long-term research of statistical data.

    CAPM quite difficult to apply in the conditions of underdevelopment of the Russian stock market. This is due to the challenges of determining betas and market risk premiums, especially for closely held businesses that are not listed on a 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 they are considered to have high degree liquidity and a very low risk of insolvency (the likelihood 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 internal market factors, can be used as a risk-free rate. Regarding the odds β , then abroad they most often use ready-made publications of these indicators in financial directories calculated by specialized firms by analyzing statistical information of the stock market. Appraisers generally do not need to calculate these ratios themselves.

    Modified capital asset valuation model ( MCAPM)

    In some cases, it is better to use a modified capital asset valuation model ( MCAPM), in which an indicator such as a risk premium is used, taking into account the unsystematic risks of the enterprise being valued. Unsystematic risks (diversifiable risks)- These are risks that arise randomly in a company that can be reduced through diversification. In contrast, systematic risk is caused by 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 of stock market development with its characteristic instability:

    D M CAPM= D b/r + β × (D r − D b/r) + P risk,

    where D b/r is the risk-free rate of return on Russian domestic foreign currency loans;

    β - a coefficient that is a measure of market (non-diversifiable) risk and reflects the sensitivity of changes in the profitability of investments in companies in a certain 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 unsystematic risks of the company being evaluated.

    Cumulative method

    It takes into account various types of investment risks and involves an expert assessment of both general economic and industry-specific and enterprise-specific factors that create the risk of not receiving planned income. The most important factors are such factors as the size of the company, financial structure, 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 an additional premium for the risk of investing in a given company, taking into account the specified factors.

    As we 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 the investment (it is believed that the greater the risk, the greater the return).

    Olson model ( Edwards-Bell-Ohlson valuation model, EBO), or the excess income (profit) method

    Combines the components of the income and cost approaches, to some extent minimizing their disadvantages. The value of the company is determined by discounting the stream 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 available information on the value of assets available at the time of assessment to calculate. A significant share in this model is occupied by real investments, and only residual profit is required to be predicted, that is, that part of the cash flow that actually increases the value of the company. Although this model is not without some difficulties in use, it is very useful in developing an organization development strategy related to maximizing business value.

    Calculation of the total market value of the company

    Once the preliminary value of the business has been determined, a number of adjustments must be made to obtain the final market value:

    • for excess/shortage 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 discounted cash flow includes the required amount of own working capital associated with the revenue forecast, if it does not coincide with the actual value, the excess of own working capital must be added, and the deficiency 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 generating cash flow were included in the calculation. This means that if there are non-core assets that have a certain value that is not taken into account 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 such assets, calculated separately. If the value of the enterprise was calculated for the invested capital, then the resulting market value applies to the entire invested capital, that is, it includes, in addition to the cost of equity, also the value of the company’s long-term liabilities. This means that to obtain the value of equity capital, 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.

    The business is capable of generating income even after the end of the forecast period. Revenues should stabilize and reach a uniform long-term growth rate. To calculate the cost in the post-forecast period, you can use one of the following methods for calculating the discount:

    • according to liquidation value;
    • by net asset value;
    • according to Gordon's 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 to current values ​​at the same discount rate that is used to discount cash flows for 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 the income approach, a financial model of cash flows is created, which can serve as the basis for making informed management decisions, optimizing costs, analyzing the possibilities of increasing design capacity and diversifying the volume of products. This model will remain useful after the assessment has been completed.

    To choose one or another method for calculating market value, you first 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, and also assess the surrounding economic environment, both global and national, including industry. If, when there is a lack of time, you need to find out the market value of a business, or confirm the results obtained using other approaches, or when an in-depth analysis of cash flows is impossible or not required, you can use the capitalization method to quickly obtain a relatively reliable result. In other cases, especially when the income approach is the only way to calculate market value, the discounted cash flow method is preferred. It is possible that in certain situations both methods will be needed simultaneously to calculate the value of a company.

    And of course, we should 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 forecast indicators in the process of applying the income approach can be useful in determining the estimated value of the company.

    The income approach is a whole combination of methods for assessing the value of real estate, the property of an organization, the business itself, in which the value is determined through conversion economic benefits that are expected in the future. Theoretical basis This approach is quite convincing. The value of an investment is the value of future benefits on this moment, which are discounted at a rate of return that reflects the riskiness of the investment.

    This is reasonable and suitable for any existing enterprise used in the production and sale of property, as well as its business, subject to the generation of positive profits. The magnitude of the risks of investing in the business being valued is demonstrated through the discount rate. In the economic sense, this role is now played by the rate of return that investors require on invested capital in comparable investment objects in terms of risk level, or it is the rate of return on alternative investment options with comparable risks at the time of assessment.

    Peculiarities

    Applying the income approach in practice turns out to be quite difficult, since it is necessary to evaluate each important determinant of value - rate of return and profit. If these methods are used to evaluate an enterprise, then it is necessary to conduct a thorough analysis of all their key elements, including cost, the company’s turnover, which have a direct impact on profits, costs and risks that are created by each individual element.

    Used quite often. For example, if we are talking about an acquisition or merger, then this method is used much more often than the cost or market method. The buyer's capital investment is now made with the expectation that net cash flows will be received in the future, which cannot be called guaranteed, since they are characterized by certain risks. The income approach allows us to estimate these key determinants of value, whereas the market approach usually requires the price-earnings ratio or some other similar earnings multiples for a retrospective period, without taking into account the future.

    Market multiples tend to be unreliable and fail to provide the same level of rigor that can be achieved using an income approach with projections of future earnings and discount rates. For example, the price-earnings ratio that is applied for the year does not sufficiently reflect expected changes in future years. The right ones provide an opportunity to demonstrate general investor preferences and are often cited by salespeople or industry sources.

    Usage

    Information regarding the enterprise budget also needs analysis and protection, which forces changes and development of the financial consequences of the created plan, forecasts and basic proposals. The income approach to business valuation measures all assumptions that relate to whether certain benefits of an acquisition arise from increased revenues, cost reductions, process improvements, or lower capital expenditures. Using this approach, you can measure and discuss all this. In addition, it can be used to determine the timing of the expected benefits, and also demonstrate the process of reducing the value of the enterprise as benefits move into the more distant future.

    Using the income approach provides a means for buyers and sellers to calculate the fair market value of a business, as well as its investment value for one or more strategic buyers. If this distinction is clearly displayed, sellers and buyers can easily identify the benefits of synergies and make informed decisions.

    When using the income approach to business valuation, it must be borne in mind that the calculated value consists of the value of all property that is used in the direct activity. Within the approach used, there are several methods for assessment that are of greatest interest. In particular, the following methods of the income approach are applicable: capitalization and discounting of cash flows. You can look at them in more detail.

    Methods

    Using the cash flow capitalization method, the total value of an enterprise is detected depending on the cash flows generated by the property potential of the enterprise. business or enterprise as a whole is the difference between all inflows and outflows of financial resources for a certain billing period. Typically, a period of one year is used for calculations. The technique is to convert a representative level of expected cash flow into a present value by dividing the total amount of the flow by the assumed capitalization rate. In this case, an income stream with certain adjustments is appropriate.

    For use conventional method Cash flow calculations use the addition of net profit (calculated after taxes) of non-cash expenses to determine the amount of absolute cash flow to capitalization. This method of calculation can be considered more simplified in comparison with the calculation of free cash flow, which in addition takes into account the required capital investments and the need to replenish working capital.

    Cash flow discounting

    This method is basically based only on the expected cash flows that are generated by the enterprise itself. Its characteristic difference is that an estimate of value is required to calculate the definition of a representative level of cash flow. This method is most widespread in developed countries due to the fact that it can be used to take into account all development prospects. Cash flow in general view equals the sum and depreciation, subject to the subtraction of the increase in net working capital and capital investments.

    The following conditions exist for using the discounted cash flow method:

    • there is reason to believe that future levels of financial flows will differ from current ones, that is, we are talking about a developing enterprise;
    • there are opportunities for a reasonable estimate of future cash flows from the use of the business or;
    • the object is at the stage of construction, full or partial;
    • The enterprise is a large multifunctional commercial facility.

    The income approach to real estate valuation through the discounted cash flow method is the best, but its use is very labor intensive. There are estimates that cannot be made without using this method. Among them are the development of an investment project with its subsequent evaluation.

    Advantages of the discounting method

    If you practice the income approach to valuing real estate or business through the discounting method, you can identify some major advantages. First of all, we are talking about the fact that future profits from a business directly take into account only the expected current costs of manufacturing products with their subsequent sale, and future capital investments associated with maintaining and expanding production or trading facilities are reflected in the profit forecast only indirectly through their current depreciation.

    Important points

    The assessment of an object using the income approach when there is a lack of profit or loss as an indicator of investment calculations is carried out with an adjustment to the fact that profit serves as an accounting reporting indicator, and therefore is subject to significant manipulations in the process.

    The discounted cash flow method includes three groups of models:


    If the income approach is used in accordance with the dividend discount model, the value of the share payout is used as evidence of cash flow. Despite the fact that the model is widely used in foreign practice for determining and assessing the value of an enterprise's assets, it has many disadvantages. There is no degree of accounting in models with retained earnings. There is a difference in dividend policies not only specific enterprises, but also for countries as a whole. This method cannot be used in enterprises that have no profit. This model is best suited for calculating the value of minority shares.

    Residual income model

    The income approach to valuation through the residual approach model assumes that the amount of residual income will be used as an indicator of cash flow, that is, the difference between the actual profit and the amount of profit that was predicted by shareholders at the time of purchase of the company itself or its shares. If the value of the enterprise was calculated on the basis of assumptions consistent with this model, then it will be equal to the sum with the present value of the expected amount of income remaining after that. This model demonstrates significant sensitivity to the quality of the data presented in the financial statements. For Russian conditions, the adequacy of such information is subject to significant doubts.

    Benefit for shareholders

    Naturally, shareholders or shareholders of an enterprise that has a certain history, as well as facts of dividend payments, can use the discounting model to calculate the value own company. The situation is that shareholders of enterprises in this sector are rarely minority, so for them the most in a suitable way will use an income approach to real estate and business valuation through a discounted free cash flow model. In this system, the key ones are free cash flows with discount rates or expected returns on invested capital. The biggest problem with using this model is the accuracy of the free cash flow forecast, as well as the adequate determination of the discount rate.

    If we apply the income approach, the definition of which was given above, then when using the discounted cash flow method, the projected financial flows that can be withdrawn from circulation after the required reinvestment of part of the cash profit are taken into account as income expected from the business. As an indicator, cash flows do not depend on the system accounting, used at the enterprise, and its depreciation policy. At the same time, any cash movements - inflows and outflows - must be taken into account. Assessing the financial meaning of discounting cash it turns out that as a result of these processes, they are reduced by amounts that would have been available to the investor at the time of receipt of the specified cash flow, provided that he did not invest his funds in this business right now, but in some other investment asset of a publicly available nature, for example, a marketable security or a bank deposit.

    Additional techniques

    The income approach, an example of which was described earlier, has recently been used less and less; now the valuation method has become the most common. It is used to value all kinds of assets, and is based on the idea that any asset that shares the basic characteristics of options can be valued as an option. At the moment, the abandonment of the income approach is most often carried out in favor of the option pricing model (respectively, the Black-Scholes model).

    Such a system, if used, makes it possible to estimate the total value of the equity capital of a company or enterprise in the event that it operates with large losses. This model is intended to further explain why the value of an enterprise's equity capital is not zero, even if the value of the entire enterprise declines below the level of the nominal amount of debt. But even taking into account this advantage, it can be noted that the Black-Scholes model for assessing the value of Russian enterprises is currently increasingly of a theoretical nature. The main problem due to which this model cannot be applied to domestic businesses is the lack of some actual data for the model parameters, which are extremely necessary.

    conclusions

    The income approach to business and real estate valuation has become much less common, and this happens for many reasons. In particular, this concerns the shortcomings that make it difficult to use in the consumer market. First of all, it should be noted how difficult it is to make forecasts of the future cost of services and products, materials and raw materials, as well as a set of other cost indicators. At the same time, we can talk about some subjectivity of expert assessments. In addition, the problem is the low disclosure of information on Russian enterprises, but it is necessary for carrying out competent calculations and drawing up the Black-Scholes model. This is largely due to the low corporate culture of such enterprises.

    The overwhelming number of shares, including large blocks of shares, are concentrated in the hands of a small circle of persons, and the share of small owners, whose share is very small, in the authorized capital is insignificant. It turns out that many enterprises are simply not interested in disclosing any information. That is why the calculation by the income approach becomes noticeably more complicated in relation to most industries and businesses in Russia. In other conditions, it works best, demonstrating all its advantages and reliability.

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