VI flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Highest and best use

The reasonably probable use that is legally permissible, physically possible, financially feasible, and maximally productive, and that produces the highest present value.

Fair market value

The price at which property would change hands between a willing buyer and willing seller, neither compelled, both having reasonable knowledge of relevant facts.

Investment value

The value to a particular investor based on individual investment requirements and expectations, which may differ from market value because of differing synergies or tax positions.

Going-concern premise

A valuation premise assuming the entity continues operating and that the assembled assets, workforce, and customer relationships have value beyond their separate liquidation amounts.

Control versus minority value

Control ownership can direct operations and cash flows and may command a premium; minority interests lack that power and may be subject to a discount for lack of control.

Independence disclosure

The requirement to disclose fee arrangements, contingent compensation, and prior or prospective engagements so the reader can assess whether the conclusion could be biased.

Exit price concept

Under accounting fair value, the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Level 3 inputs

Unobservable inputs for the asset or liability, reflecting the reporting entity's own assumptions about what market participants would use in pricing.

Goodwill calculation

Consideration transferred plus noncontrolling interest plus previously held interest, minus the fair value of net identifiable assets acquired, measured at the acquisition date.

Identifiable intangible criteria

An intangible is recognized separately from goodwill if it is separable, capable of being sold or licensed, or arises from contractual or other legal rights.

Recoverable amount

The higher of an asset's fair value less costs of disposal and its value in use; impairment exists when carrying amount exceeds this amount.

Contingent consideration

Consideration payable contingent on future events, measured at fair value at acquisition; if classified as a liability it is remeasured through earnings each period.

Capitalization rate

A divisor applied to a single normalized benefit stream to estimate value; it equals the discount rate minus expected sustainable long-term growth.

Weighted average cost of capital

The blended after-tax cost of debt and cost of equity weighted by market value proportions of debt and equity, used to discount enterprise cash flows.

CAPM cost of equity

Risk-free rate plus beta multiplied by the equity risk premium, optionally plus size and company-specific premiums, representing required return on equity capital.

Terminal value perpetuity

Final-period cash flow multiplied by one plus growth, divided by the discount rate minus growth, capturing all cash flows beyond the explicit forecast horizon.

Mid-year convention

A discounting convention treating cash flows as received evenly through each period, producing a higher present value than end-of-period discounting.

Guideline company method

A market approach method applying pricing multiples from publicly traded comparable companies to the subject company's operating metric, with adjustments for relative risk and growth.

Normalizing adjustments

Adjustments removing nonrecurring items and nonoperating income, and restating owner compensation and related-party rents to market levels, to derive sustainable earnings.

Enterprise to equity bridge

Equity value equals enterprise value minus debt, preferred stock, and noncontrolling interest, plus cash and nonoperating assets.

Discount for lack of marketability

A reduction in value reflecting the inability to quickly sell an ownership interest in a private entity, supported by restricted stock and pre-IPO price studies.

Relief-from-royalty method

An income approach valuing an intangible as the present value of royalty payments avoided by owning rather than licensing the asset.

Multi-period excess earnings

An income approach valuing a primary intangible as the residual of projected cash flows after deducting fair returns on contributory assets such as working capital and fixed assets.

With-and-without method

An income approach measuring intangible value as the difference between the business value with the asset in place and the business value without it.

Indefinite-lived intangible

An intangible with no foreseeable limit on the period it will contribute cash flows; it is not amortized but is tested for impairment at least annually.

Depreciated replacement cost

Replacement cost new reduced by physical deterioration, functional obsolescence, and economic obsolescence, representing value under the cost approach.

Economic obsolescence

A loss in value caused by factors external to the asset, such as reduced demand, excess industry capacity, or regulatory change, applied after physical and functional deductions.

Bond premium pricing

A bond sells above par when its stated coupon rate exceeds the market yield required for comparable credit risk and maturity.

Modified duration

A measure of a bond's price sensitivity; it approximates the percentage change in price for a one percentage point change in yield.

Preferred stock valuation

Value approximated as the stated annual dividend divided by the required rate of return, adjusted for call features, participation rights, or cumulative dividend arrears.

Direct capitalization property

Real property value estimated by dividing stabilized net operating income by an overall capitalization rate extracted from comparable market sales.

Functional obsolescence

A loss in value within the asset itself due to inadequacy, deficiency, or superadequacy in design, materials, or technology relative to current market standards.