Research of the Critical Capitalization Rate in Building Damage Appraisal

From the perspective of building health monitoring and property management, this research proposes some parametric measures of the capitalization rate, in order to define a range of significant values to be used in a cash flow analysis intended for monetary evaluation in partial building damage assessment. If criteria and methods for appraising partial damage to buildings are widely shared in the scientific and professional communities, the identification of the most appropriate capitalization rate is rather more controversial, and certainly more complex. The proposed approach borrows the logical principles of cash flow analysis based on the yield capitalization approach, considering both recovery costs and loss of incomes when building partial damage occurs. The procedure is a differential valuation that considers a situation before and a situation after the damage, basing on the cost approach and the income approach. In particular, two distinct conditions are considered: the case of recovery interventions and that of improvement.

Real Options for Risk Analysis in Estimating the Capitalization Rate

A suitable cap-rate is generally determined through an analogical process in order to estimate the value of any real estate through the capitalization of the incomes. The analogy relates to the risk and duration of similar investments. There are numerous methods to rationalize the valuation of the cap-rate. Appraisals have a certain degree of uncertainty in all these methods. This paper proposes a methodology which removes any uncertainty when evaluating the cap-rate. This is achieved through the combination of the formal logic of the Ellwood’s model and the Real Options Analysis.

Insolvency Risk. Application of Altman Z-score to the auto parts sector in Romania

This paper intends to apply the Altman Z-score model to all the companies active in the wholesale of motor vehicle parts and accessories (NACE 4531), with extended financial statements. Using the panel data model over the time series for 2008-2016 on the companies of this sector, we conclude that 99% of the Z-score is explained by the independent variables (working capital, capital structure, turnover, earnings before interest and tax), with estimated parameters very close to the models classical values. The sample description of the paper and the corresponding results highlights the Z-score evolution by turnover clusters and principal components, with the largest companies performing the best (the only cluster with Z-score median above 3). We notice a tendency for decreasing high risk companies and increase in the medium risk companies, whereas the low risk companies are relatively stable. This improvement is mostly due to increasing capitalization rate and less external debt, despite the deteriorating working capital and operating margin. We believe that future research to evaluate Z-score sensitivity under stress test scenarios would be very useful to provide an insight of companies’ insolvency risk amid increasing interest rates and different fiscal tax on dividend.

METHODICAL APPROACH TO FORECASTING THE REAL RETURN ON INVESTMENT IN NON-STATE PENSION FUNDS

In the article the methodical approach to determining the projected real return on investment related to a private pension funds (PPFs) is proposed. The technique involves variant calculations and allows maximization the real return of investor based on the variation of input parameters. The first stage involves building the model for forecast investments in PPF, taking into account compound interest. At the second stage, the calculation of periodic pension benefits is based on the forecast rate of return. At the third stage, an investor, based on the model, can perform the inverse operation – to determine the return on investment without taking into account inflation, using the money-weighted rate of return, based on NPF’s proposal for payments. At the fourth stage, the real return on investment is calculated taking into account the inflation rate. The criterion for the choice of investment conditions is the maximum real return on investment. The capitalization rate is compared with the risk-free rate.

Determinants of Bank Profitability in CEE Countries: Evidence from GMM Panel Data Estimates

Given the high resilience of the Central and Eastern Europe (CEE) banking sectors during the last financial crisis and their major role in the CEE region in financing the economy and supporting the high growth rates achieved there, our paper investigates the determinants of banking profitability in the CEE banking sectors based on a Generalized Method of Methods (GMM) approach using data between 2009 and 2018. We have selected determinants from the macroeconomic factors and from the financial-banking specific factors using a two-step GMM method. Our findings demonstrate that unemployment rate, inflation, budget balance, non-governmental credit, non-performing loan rates, concentration rate and capitalization rate negatively impact on the banking profitability in the CEE banking sectors. According to these findings, some policy recommendations were elaborated.

Company-Specific Risk and Small Company Valuation

A significant role of forensic accountants is valuing privately held companies (Domino, Stradiot and Webinger 2015; Trugman 2017; Allee, Erickson, Esplin and Yohn 2020). This study examines the role of private company transaction features on the composition of capitalization rates, industry risk premiums, and company-specific risks for private companies. We find that company-specific risk accounts for at least 50 percent of the capitalization rate. Further, while the industry risk premium represents less than 2 percent of the capitalization rate, it is significantly associated with company-specific risk, suggesting that industry risk is an important determinant of company-specific risk. Finally, we find evidence that several private company transaction features are associated with company-specific risk. These findings represent an important step in understanding capitalization rates and company-specific risk for private company valuation. These findings should also help practitioners and academics better determine the cost of capital for private companies.

Development of the Risk Accumulation Method for Calculating the Capitalization Rate

Risk build-up method is the most used for calculating the capitalization rates. With the help of the literature analysis, the origin of this method is considered. The method was based on the relationship between risk and profitability of a stock in exchange trading, proven statistically. Later, when formulating the build-up method, this idea was transferred without any justification to the valuation of enterprises that do not list their securities on stock exchange. In other words, the formulas traditionally used in the application of the build-up method are empirical in nature and not precise.It is more accurate to write them down by analogy with Irwin Fisher's equation of returns. Based on the principle of dependence, one of the main ones for the valuation procedure, the essence of which is that the value of the valuation subject depends on its economic location, a set of four independent risks is given for use in the build-up method in general case: risk-free rate, country risk premium, branch risk premium, and subject risk adjustment. It is noted that the numerical value of these parameters used in the method fundamentally depends on the monetary unit used in the calculation (the valuation currency). Recommendations are given on finding a risk-free rate for various currencies, on calculating country risk premium, branch risk premium, and subject risk adjustment. The article is intended for academics, lecturers, and practitioners in such areas as corporate finance, business microeconomics, valuation, and investment analysis.