PRC Appraiser flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Market value definition
- The estimated amount for which an asset should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing, with each party acting knowledgeably, prudently and without compulsion.
- Replacement vs reproduction cost
- Replacement cost rebuilds an equivalent new asset using current technology; reproduction cost rebuilds an identical asset. Use replacement cost when technology has advanced, because reproduction cost overstates value by including obsolete design.
- Functional obsolescence
- Value loss caused by internal factors such as new technology, excess operating cost, over-capacity or design redundancy in the asset itself, as distinct from physical wear and from external economic obsolescence.
- Economic obsolescence
- Value loss from external factors outside the asset, such as policy changes, market decline, supply constraints or environmental restrictions. It reduces value even when the asset is physically sound and technically current.
- Gordon growth formula
- V = CF1 / (r − g), where CF1 is next period's cash flow, r the discount rate and g the sustainable growth rate. Valid only when r exceeds g and growth continues indefinitely.
- Market approach adjustment formula
- Value = comparable price × transaction-condition factor × time factor × location factor × individual-factor factor. Factors above one raise the value; those below one lower it. At least three comparables are normally used.
- Composite newness rate
- 综合成新率 combines an age-based rate (remaining life divided by total life) with an observation-based score, often weighted 40% and 60%. It is multiplied by replacement cost to give machinery value.
- Imported equipment cost build-up
- Replacement cost adds FOB price times exchange rate, overseas freight and insurance, customs duty, consumption tax, non-deductible VAT, bank charges, domestic freight, installation and construction-period capital cost.
- Net operating income
- Effective gross income minus operating expenses. It excludes depreciation, income tax, loan principal and interest, and capital expenditure, because those are financing or capital items rather than property operations.
- Capitalization rate build-up
- r = risk-free rate + risk premium, or safe rate plus risk compensation. Land and building may carry different risks, so a weighted rate is used when their values are capitalized separately.
- Highest and best use
- The use that is legally permissible, physically feasible, financially feasible and produces the highest value. It governs development assumptions in the cost and income approaches for real property.
- Relief-from-royalty method
- Intangible value equals the present value of royalties avoided by owning the asset rather than licensing it: revenue times royalty rate times (1 − tax rate), discounted at the required rate.
- FCFF formula
- Free cash flow to the firm = EBIT × (1 − tax rate) + depreciation and amortization − capital expenditure − increase in net working capital. It is discounted at WACC to obtain enterprise value.
- WACC formula
- WACC = E/(D+E) × Re + D/(D+E) × Rd × (1 − t). Use market-value or target weights, not book weights, and a cost of debt reflecting current borrowing conditions.
- Enterprise to equity bridge
- Equity value = enterprise value − interest-bearing debt + cash. Enterprise value equals equity value plus interest-bearing debt minus cash, and also equals the present value of FCFF at WACC.
- Terminal value by exit multiple
- Terminal value = final-year EBITDA times a peer or transaction multiple. It must be cross-checked against the Gordon growth result, since the two methods can diverge widely.
- DLOC and DLOM
- Discount for lack of control reflects minority status; discount for lack of marketability reflects inability to sell quickly. When both apply they are usually compounded multiplicatively, not added.
- Goodwill impairment rule
- Goodwill arises only in a business combination and is not amortized. It is tested for impairment at least annually; any write-down goes to profit or loss and is not reversed under IFRS-style rules.
- NPV decision rule
- NPV = present value of cash inflows minus initial outlay, discounted at the project's required rate. Accept projects with positive NPV; among mutually exclusive projects, choose the highest positive NPV.
- Degree of operating leverage
- DOL = contribution margin / EBIT, where contribution margin is sales minus variable costs. It measures the percentage change in EBIT for a one percent change in sales volume.
- DuPont decomposition
- ROE = net profit margin × total asset turnover × equity multiplier. It separates profitability, efficiency and leverage, showing whether a high return comes from operations or from borrowing.
- Cash conversion cycle
- Inventory days plus receivable days minus payable days. A shorter cycle frees cash; a longer cycle ties up working capital and raises financing needs and liquidity risk.
- Effective annual rate
- EAR = (1 + r/m)^m − 1, where r is the nominal annual rate and m the compounding periods per year. It exceeds the nominal rate whenever compounding occurs more than once a year.
- Void versus voidable contract
- A void contract has no legal effect from the start, for example because of illegality. A voidable contract is valid until the injured party rescinds it, as with fraud, duress or material misunderstanding.
- Piercing the corporate veil
- A shareholder who abuses the company's independent legal personality to evade debts or harm creditors may be held jointly liable for company obligations, losing the normal protection of limited liability.
- Break-even quantity
- Fixed costs divided by the difference between unit price and unit variable cost. At that volume total contribution equals fixed costs and operating profit is zero.
- Fair value definition
- The price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is an exit price, not an entry or historical cost.
- Lower of cost and NRV
- Inventory is measured at the lower of cost and net realizable value, where NRV is estimated selling price minus completion and selling costs. Write-downs go to profit or loss and may be reversed if NRV recovers.
- Revenue recognition five steps
- Identify the contract; identify performance obligations; determine the transaction price; allocate it to the obligations; recognize revenue when each obligation is satisfied, either at a point in time or over time.
- Double-declining depreciation
- Annual depreciation = 2 divided by useful life, multiplied by the opening carrying amount. The charge declines each year and stops when carrying amount reaches the estimated residual value.
- Retained earnings roll-forward
- Ending retained earnings = opening retained earnings + net income − dividends declared. Net income links the income statement to the balance sheet through this account.
- Impairment recoverable amount
- The higher of fair value less costs of disposal and value in use. If carrying amount exceeds recoverable amount, the asset is written down to recoverable amount through profit or loss.