Analyzing Complex Appraisals for Business Professionals by Shannon P. Pratt

Author:Shannon P. Pratt
Language: eng
Format: epub
Publisher: McGraw-Hill Education
Published: 2016-03-14T16:00:00+00:00

Valuing Total Invested Capital Versus Direct Valuation of Equity

In real estate appraisal, property normally is appraised without regard to how much debt or other claims there may be against it. In business appraisal, if all components of the capital structure are appraised, it is usually called value of invested capital or market value of invested capital (MVIC). However, in business appraisal, the equity interest sometimes is valued directly without going through the step of estimating the value of the entire company, including debt and equity interests combined.

To get to a value for the equity, one can use market multiples of various levels of income available to equity owners (for example, price-to-earnings ratios). Alternatively, one can value the entire invested capital, including returns available to holders of interest-bearing debt and preferred stock, and then subtract the value of the senior securities to get to the value of the common equity.

Either procedure can be used for valuing either controlling or minority interests. However, the invested capital procedure tends to be preferred for valuing controlling interests, and the direct valuation of equity tends to be preferred for valuing minority interests. The reason for this preference is that a controlling interest holder can change the capital structure if that may enhance the value of the equity, while the minority interest owner does not have that option. However, if the subject and guideline companies have considerably diverse capital structures, eliminating the potential effects of that difference sometimes is a reason, and even a compelling reason to use the invested capital procedure even when valuing minority interests.

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