Question

Write a list of key ‘facts to know’ about capitalization rates and how they are utilized in financial valuations. [Note: the formula, Price = Forward NOI / Cap Rate, is too obvious.] Think adjustments, projections, etc.

Answer 1

When we are calculating the capitalisation rates we need to adjust the capitalisation rates with various kinds of risk factor in order to ascertain the actual capitalisation rate which will reflect the true risk exposure of the firm and the true value of the firm in regards to its competitors and industry.

there are other factors also well calculation of capitalisation rate will need to accounts into those factors could be attributed to the inflation ,and interest rate adjustment, along with the growth rate fluctuation, and the life cycle of the company.

These factors are needed to be accounted into in order to get actual capitalisation rate which will reflect that true market value of the company when the the forward net operating income is adjusted with discounting rate, so there should be a adjustment in both the denominator and nominator in order to adjust market capitalisation rate,and it should be properly adjusted in order to project imarket capitalisation.