CPV Asset Valuation Practice II flashcards

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

Capitalization rate

A divisor converting a single year's normalized income into value, reflecting required return minus sustainable growth. Used in direct capitalization when income is stable and perpetual.

Weighted average cost of capital

The blended after-tax cost of debt and equity weighted by market values. It discounts free cash flow to the firm when valuing the entire enterprise rather than equity alone.

Control premium

The amount a buyer pays above minority share price to obtain control. Its reciprocal relationship with the minority discount means both cannot be applied to the same value base.

Normalized earnings

Reported earnings adjusted to remove nonrecurring items and restate owner compensation to market levels, producing a sustainable benefit stream for capitalization or discounting.

Excess earnings method

A hybrid method valuing tangible assets at fair value plus capitalized earnings above a required return on those tangible assets, often used for small businesses and intangibles.

Terminal value

The present value at the end of the projection period of all subsequent cash flows, usually computed with the Gordon growth formula using a sustainable long-run growth rate.

Effective age

The age indicated by an asset's condition and utility rather than its chronological age. It drives age/life depreciation and reflects maintenance, use, and obsolescence.

Economic obsolescence

A loss in value caused by external factors outside the asset, such as reduced demand, excess industry capacity, or regulatory change. It is measured from market evidence, not age.

Functional obsolescence

A loss in value from within the asset, such as excess capital cost, excess operating cost, or layout inefficiency relative to a modern replacement. Quantified by cost or capitalized cost difference.

Orderly liquidation value

The value realized in a liquidation sale allowing a reasonable marketing period to find buyers, as opposed to a forced sale with a compressed exposure period.

Replacement cost new

The cost to acquire a new asset of equivalent utility and capacity. It is the starting point of the cost approach for machinery and personal property.

Trending

Adjusting a historical cost by the ratio of a current price index to the historical index to estimate replacement cost new at the valuation date.

Trade fixture

Personal property annexed by a tenant for business use that remains the tenant's property and is removable if removal does not materially damage the realty.

Reproduction cost

The cost to recreate an identical asset using the same materials and methods. It typically exceeds replacement cost for antiques, custom items, and obsolete equipment.

Salvage value

The estimated amount received on disposal of an asset in its current condition, as distinguished from scrap value, which reflects only recoverable material content.

Valuation premise

The stated assumption about the conditions of the sale, such as in-place, installed, removed, orderly liquidation, or forced liquidation. It governs the cost base and deductions.

Bulk lot valuation

Valuing numerous items as a single group when individual sale is impractical, applying a bulk discount that reflects reduced per-unit realization in the market.

Carat

The unit of weight for gemstones equal to 200 milligrams, or 0.2 grams. One point equals one-hundredth of a carat.

Four Cs

Cut, color, clarity, and carat weight: the primary value drivers for diamonds, with color and clarity grades typically established by a recognized gemological laboratory.

Fineness

The proportion of precious metal in an alloy, expressed in parts per thousand. Eighteen-karat gold is 750/1000 fine; sterling silver is 925/1000.

Hue, tone, saturation

The three dimensions used to describe and grade colored stones: hue is color family, tone is lightness or darkness, and saturation is intensity.

Insurance replacement value

The retail cost to replace an item with a new comparable item at current prices. It exceeds fair market value because it assumes a retail purchase without bargaining.

Direct capitalization

Dividing a property's stabilized net operating income by a market-derived capitalization rate to estimate value in a single year's analysis.

Net operating income

Effective gross income less operating expenses and reserves, before debt service, income tax, depreciation, and capital expenditures. It is the income capitalized in direct capitalization.

Gross rent multiplier

Sale price divided by gross rent, applied to the subject's rent to estimate value. It is reliable only when comparables have similar expense ratios.

Highest and best use

The reasonably probable use that is legally permissible, physically possible, financially feasible, and maximally productive, tested both as vacant and as improved.

Leased fee interest

The landlord's interest in a property subject to existing leases, including the right to receive contract rent. It differs from fee simple, which assumes market rent.

Land value by extraction

Estimating land value by subtracting the depreciated cost of improvements from a comparable sale price of an improved property.

Scope of work

The type and extent of research and analysis required for credible assignment results, determined by intended use, intended users, and the property's characteristics.

Field review

A review that includes inspection of the subject property and verification of comparable data, in addition to analysis of the report's methodology and compliance.

Administrative review

A review limited to checking that the report is complete, internally consistent, and compliant with reporting standards, without reanalyzing the valuation methodology.

Contingent fee prohibition

The rule that an appraiser's compensation must not be contingent on a predetermined value, a value direction, or the outcome of the assignment.