Question

Discuss the following approaches to valuation: i)Adjusted present Value Approach ii)Excess return Model iii)Contigent Valuation Model for undeveloped land iv) Replacement Cost

Answer 1

i) Adjusted present Value Approach

Adjusted present value approach is define as the net present value of a project if financed only by equity plus the present value of any financing benefits is another way to evaluate the investment. This method is the same as the discounted cash flow method. The only difference is that in this method cost of equity is used as the discount rate instead of WACC. This method also includes tax shields such as for interest which is tax deductible. This method is effective for highly leveraged transactions.

ii) Excess return Model

In this valuation, the growth has value only when there is excess returns that is returns on equity that exceed the cost of equity. This model takes this conclusion to logical next step and compute the value of a firm is a function of expected excess returns.

iii) Contigent valuation model for undeveloped land

Under this valuation approach, we determine a household's individual discount rate with this method using the payment schedules that extend for different lengths of time. This discount rate is used in various welfare analysis.

iv) Replacement cost

Replacement cost approach refers to amount the entity will have to pay to replace an asset at the present time as per its current worth. In this method if as asset is replaceable will it benefit the company on replacing the asset based on its present value.