Valuation of Tangible and Financial Assets
Tangible assets
For real estate, machinery, and equipment, the cost approach (replacement or reproduction cost less physical, functional, and economic obsolescence) is central, alongside the sales comparison and income approaches. Know the three obsolescence types: physical deterioration (wear and tear), functional obsolescence (inefficiency or excess capacity relative to modern alternatives), and economic obsolescence (external factors such as location or market decline).
For real property, the income approach uses direct capitalization (NOI ÷ cap rate) or DCF. NOI is computed before debt service and income taxes but after operating expenses and reserves. Traps: (1) Deducting mortgage interest from NOI. (2) Ignoring lease terms - above- or below-market leases create leasehold value. (3) Confusing reproduction cost (identical replica) with replacement cost (equivalent utility).
Financial assets
For bonds, know that price moves inversely to yield, and that a bond trades at a premium when coupon exceeds market yield, at a discount when below. For equity securities, use the market price when a liquid, quoted price exists; otherwise apply the market, income, or asset-based approach. Restricted stock and closely held shares may require a DLOM.
Rule of thumb: Value = replacement cost new − physical deterioration − functional obsolescence − economic obsolescence. Worked example: replacement cost new $1,000,000, physical deterioration $200,000, functional obsolescence $100,000, economic obsolescence $150,000 → value ≈ $550,000.
For a bond: if market yield rises above the coupon rate, the bond's price falls below par.