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An investor's expected return on a property related to real estate has two main components - it provides for a full recovery of the invested funds (return on capital) and the receipt of profit or remuneration (return on capital):
Return on capital (return ON investment) and
- return of capital (return OF investment), i.e. I= I0N + I0F
Return on Investment is the necessary compensation received by the investor for the value of money, taking into account the factor of time, risks and other factors. This is the percentage that is paid for the use of funds. It is also called return (yield). The term "return on capital" refers to the additional amount of money received as compensation for using an investor's capital until it is recapitalized. The capital invested in real estate can be recapitalized in several ways (for example, through current annual income or resale of property). The owner can use this part of the income as he sees fit.
Return of Investment means that the investor receives the entire amount of the initially invested funds (investments) in the property for a certain period of time. This is also called capital recovery. It is assumed that the investor is reimbursed for that part of his capital, which during the period of ownership will be lost due to wear and tear of improvements.
Rates of return on capital and return on capital can be defined as either Income Rates or Yield Rates.
Income Rate is the ratio of annual income to cost; it can be used as a capitalization factor to convert income into value. The Yield Rate is applied to a series of individual returns to determine present value everyone. Both indicators can be used to analyze the value of real estate and the physical condition of the property when applying residual techniques in the capitalization procedure.
The capitalization ratio used for valuation can be an Income Rate or a Yield Rate, but it must represent the annual rate of return required to attract the invested capital. Since rates of return are forward-looking, the market's understanding of risk and changes in purchasing power that are reflected in inflation and deflation are important considerations. The capitalization ratios chosen should reflect market expectations.
Consider the main types of rates - which include the general capitalization ratio, the capitalization ratio for equity, the interest rate on the loan, the discount rate, the internal rate of return and the rate of return on equity.
The overall capitalization rate (Overall Capitalization Rate or Overall Rate of Return - R0) is the rate of return for the entire property, which reflects the ratio between its expected annual net income and total cost. It is used to convert (convert) net operating income to total property value. The overall capitalization ratio does not characterize the effectiveness of investments in real estate and is not an indicator of the return on capital. It can be greater than, less than or equal to the expected return on capital invested in real estate.
Equity Capitalization Rate (RE)- the rate of return, which reflects the ratio between the expected annual cash flow before tax and equity investments. This indicator is also not an indicator of return on equity.
The overall capitalization ratio and equity capitalization ratio are Income Rates. They are not rates of return on capital and do not reflect the ultimate rate of return on equity.
Mortgage Rate- R.M.
Interest Rate is the rate used to convert cash flows to their future value or to discount expected future amounts to their present value. It does not take into account the return of capital.
Discount Rate is the rate that is used to convert future earnings into present value. The result obtained reflects the amount of capital that must be invested so that the investor's expected return equals the specified discount rate.
Yield Rate is the rate of return on capital. It is usually expressed as a compound annual interest rate. The Yield Rate takes into account all expected income, including those received from the sale of real estate after the expiration of the ownership of the investee.
Internal rate of return (IRR) (internal rate of return)- correlates with the rate of return that is valid or expected for these capital investments during the forecast period (the expected period of ownership until the resale of the property). The IRR equates the present value of future investment income, including the sale proceeds at the end of the holding period, to the amount of capital invested. The IRR can be used to determine the rate of return on invested capital before or after taxes. It is used in the evaluation of investment projects.
Overall Yield Rate - Y()) is the rate of return on all capital. It is the weighted average rate of return on equity and the rate of return on a mortgage loan (interest rates).
Equity Yield Rate - YE - (return on equity) is the rate of return on equity invested by the owner.
YM is the Mortgage Yield Rate for borrowed capital.
In discounted cash flow (DCF) income capitalization, a clear distinction is always made between return on capital (on) and return on capital (of), and the discount rate is chosen to provide the required return on capital (on). With direct capitalization, the rates of return used must provide both components: b return on capital (on), and return on capital (of), while a clear distinction is not made. The valuation obtained by applying the total capitalization ratio to property income reflects both the return on capital and the recapitalization of invested funds. The overall capitalization ratio is generated based on market information and assumes both return on equity and return on equity.
Different ratios can be used in real estate valuation depending on which components of the property are being valued (land or improvements) and what real property rights are taken into account. In the table, the last two columns indicate whether this ratio takes into account only the return on capital component (on) or also takes into account the capital recovery component (of) (indicated: included (+), not included (-)).
The structure of the total capitalization ratio:
R0N=R0N+R0F0F
where
R 0N - component, called the rate of return on capital, the rate of return or the discount rate and denoted hereinafter as Y0
R 0F is the recapitalization ratio (or rate of return of capital), determined by the factor of the compensation fund, but, as we will find out later, not necessarily formed by the rate of return on the initial investment.
The capitalization ratio R 0 and the rate of return Y 0 always differ in the depreciation component where there are improvements created by human hands. In the stock market, where the commodity is securities (stocks, bonds, etc.), and in the evaluation of land (and land, as you know, is not subject to wear and tear, inexhaustible), the capitalization ratio is equal to the rate of return on investment, that is, R0 = Y0 since there is no depreciation in these cases.
Thus, the variety of types of income and rates of return allows the appraiser to model the basic methods of the income approach, depending on specific circumstances, such as the nature of the information available, the possibility of using tax data, the type of property, the purpose of the valuation, the type of value, etc. However, the appraiser must comply with the rule of adequacy (correspondence) of the types of income used and the rates of return.
What is the investment rate of return? How is this indicator calculated? Why is it important for investors?
Investment rate of return is the annual return on investment, expressed as a percentage of the total amount invested. It is also the return on a security with a constant return.
The investment rate of return is a simple and straightforward way to charge investors for using their money. Thus, investors can compare various investment options and choose the best among them - based, of course, on their individual goals and at an acceptable level of risk. Profitability has a second, equally important purpose: it serves as a general indicator characterizing the financial position of the company. In this case, it is often called profitability (profitability level). For example, indicators of profitability (profitability) of assets, own (share) capital, and sales are widely used.
There is a basic formula that works in many cases, at least for starters.
[(Current investment amount - original investment amount) / original investment amount] x 100% = return
If 1000 f. Art. invested in shares, and in a year this investment is worth £1,100. Art., then the return on this investment is calculated as follows:
[(1100 - 1000)/1000] x 100% = (100/1000) x 100% = 10%.
[(2000 - 1000)/1000] x 100% = 100%.
Rate of return after the second year:
[(1200 - 2000)/2000] x 100% = -40%.
The two-year average (also known as the arithmetic mean) annual return is calculated using the following formula:
(Year 1 return + Year 2 return)12 = Average annual return
Substituting the known values into this formula, we get:
/2 = 30%
Note that the average annual rate of return is a percentage that is only accurate for short periods, so it can only be used in certain cases. Geometric or compound returns are better suited for evaluating long-term investments because compound interest effects are taken into account. It is clear that this formula is more complicated, and it is beyond the scope of this article. Pay attention also to the following points:
- The real rate of return is the annual return received from an investment, adjusted for price changes due to inflation. If the investment brought in 10%, but inflation for the same period was 2%, then the real rate of return is only 8%.
- Do not confuse the rate of return with the internal rate of return, which is calculated using a more complex formula.
- Some mutual fund managers have become notorious for publishing the average annual rate of return on investments they manage. But this is a deceptive number. Thus, in the second example we have considered, the value of the investment has increased by £200 in two years. Art., which is 20%, while the average rate of profit is 30%.
1. Rate of return on investment;
2. Rate of return on investment.
The size of the risk-free rate of return was determined in paragraph 7.2 and amounted to 11.74%.
The risk premium associated with real estate investments was determined based on the weighted average assessment of the levels of the following types of risk:
The risks associated with political decisions are assessed at the average level, because in the current period, political decisions are greatly influenced by the unstable situation in the global financial markets;
The risks associated with the regional specifics of the real estate market are assessed at a level below the average, since in the Tula region, the process of lawmaking is systematically going on, incl. regulatory framework in real estate. But this process is not yet complete.
Influence Risks environment for the property are rated low, because The Tula region does not have significant aggressive natural factors that can significantly worsen the condition of the object of assessment;
The risks associated with investments in certain types of real estate are assessed at an average level, since there are relatively few options for operating the commercial building being assessed, and all of them do not require special conditions.
The results of calculating the premium for risks associated with real estate investments are shown in Table 12.
Table 12 Calculation of the premium for risks associated with real estate investments
| Risk premium | |||||
| Risk level scale | short | below the average | average | above average | tall |
| 1% | 2% | 3% | 4% | 5% | |
| Risks associated with political decisions | + | ||||
| Risks associated with regional specifics of the real estate market | + | ||||
| Environmental risks | + | ||||
| Risks associated with investments in certain types of real estate | + | ||||
| 1 | 1 | 2 | 0 | 0 | |
| 1 | 2 | 6 | 0 | 0 | |
| Overall weighted total | 7% | ||||
| Total number of observations | 4 | ||||
| 1,75% | |||||
The risk premium associated with investment management (lack of professional property managers) was determined based on a weighted average assessment of the levels of the following types of risk:
The risk of underloading the facility is assessed at an average level, due to the fact that in its immediate environment there are potential competitors - buildings of a similar purpose;
Risks associated with non-use of the facility for the most effective way, are estimated at a level below the average, because the property under appraisal does not have many alternative operating options, and at the same time, the current use as a shopping center is in demand in the local market;
The risk of loss of consumer properties by the object is assessed as low, because the object is in excellent technical condition, while the functioning of this building does not apply specific requirements to the level of finishing or technical equipment of the premises;
The risk of inefficient personnel management is assessed as below average, because the operation of a shopping center does not require highly qualified personnel, but there is always a risk of inefficient management;
The risks associated with financial planning are assessed at an average level, given the scale and area of the facility, as well as the unstable situation in the financial markets, and the recent uncertainty in the exchange rates of major currencies.
The results of calculating the risk premium associated with investment management (lack of professional property managers) are shown in Table 13.
Table 13. Calculation of the premium for risks associated with investment management
| Risk factors for investing in the subject property | Risk premium | ||||
| Risk level scale | short | below the average | average | above average | tall |
| Scale expert assessments risk premiums | 1% | 2% | 3% | 4% | 5% |
| Risk of object underloading | + | ||||
| Risks associated with not using the facility in the most efficient way | + | ||||
| Risk of loss of consumer properties by the object | + | ||||
| Risk of inefficient personnel management | + | ||||
| Financial planning risks | + | ||||
| Number of physical observations | 1 | 2 | 2 | 0 | 0 |
| Number of observations weighted | 1 | 4 | 6 | 0 | 0 |
| Overall weighted total | 11% | ||||
| Total number of observations | 5 | ||||
| Average weighted risk premium | 2,20% | ||||
Based on the analysis of data from the website www.rusbonds.ru, the Ministry of Finance of the Russian Federation was chosen as the most reliable issuer of securities. According to quotations of ruble-denominated government bonds maturing in 2011-2013. average rates of effective yield to maturity were determined (Table 14). The arithmetic mean of these values is used as the risk-free rate in determining the rate of return on capital.
Table14. Calculation of the average effective yield to maturity on Russia bonds with maturity dates 2011-2013
| Paper | maturity date | Exchanges | Yield to maturity, effective |
| OFZ-25063-PD | 09.11.2011 | MICEX | 11,46% |
| OFZ-25064-PD | 18.01.2012 | MICEX | 11,56% |
| OFZ-25065-PD | 27.03.2013 | MICEX | 11,96% |
| OFZ-25067-PD | 17.10.2012 | MICEX | 11,97% |
| The average | 11,74% |
Thus, the risk-free rate of return was 11.74%.
Liquidity refers to the speed with which an asset can be turned into cash. cash. Real estate is a low-liquid commodity, especially in the context of unregulated mortgage lending. Compensation for low liquidity is calculated using the formula:
An analysis of the real estate market in the Tula region showed that the average exposure period non-residential buildings, similar to those estimated, is 6 months.
The calculation of the discount rate using the cumulative construction method is summarized in Table 15.
Table 15. Calculation of the discount rate
The real estate object has a finite (limited) period of economic life (the period during which the operation of the object is physically possible and economically profitable). The income generated by the property must compensate for the loss of its value by the object by the end of its economic life. Quantitatively, the amount of income required for such compensation is expressed through the rate of return of capital.
There are three ways to calculate the rate of return on capital:
1. Straight-line capital return (Ring's method): involves the return of capital in equal installments over the life of the asset, the rate of return in this case is the annual share of the initial capital deducted to an interest-free compensation fund.
2. Return of capital at the compensation fund and the risk-free interest rate (Hoskold method): assumes that the compensation fund is formed at the lowest possible rate - the "risk-free" rate.
3. Return of capital at the recovery fund and rate of return on investment (Inwood method): assumes that the recovery fund is formed at an interest rate equal to the rate of return on investment (discount rate).
In this assessment, the Hoskold method is used, which, according to the appraisers, is the most suitable for investment conditions in Russia
where NVK - the rate of return of capital,%; i is the risk-free rate; n is the average period of ownership of the object.
It is assumed that the term of ownership of the property being valued will be 49 years.
Table16. Calculation of the rate of return on capital
The overall capitalization ratio is determined by summing the rate of return on investment and the rate of return on capital.
Table 17. Calculation of the total capitalization ratio
Thus, the overall capitalization ratio is 23% rounded, which is the most realistic direct capitalization rate for the property being valued.
Calculation of the value of the object of assessment using the method of direct capitalization of income is summarized in Table 18:
Table 181. Calculation of the value of the object of assessment using the income approach
Thus, the value of the appraisal object is the building of the trade pavilion located at the address: Tula region, Kimovsk, st. Lenina 52a, determined by the income approach is 119045 rubles. excluding VAT.
6.6 SUMMARY OF THE RESULTS OF THE MARKET VALUE OF REAL PROPERTY
To determine the market value of appraisal objects, three approaches to appraisal were used: cost, comparative and profitable.
Table 19. Results of calculating the cost of an object using different approaches
The purpose of summarizing the results of all used approaches is to determine the advantages and disadvantages of each of them in relation to the object of assessment and, thereby, the development of a single cost estimate.
Significant differences in the values obtained by applying the comparative and income approaches to valuation are explained by the inconsistency of price offers for the sale and lease of similar real estate objects, which arose due to the uncertainty of the real estate and capital markets associated with the progressing economic crisis. The owners of commercial real estate continue to consider it as a means of accumulation, which, despite all the forecasts, is not significantly cheaper, with the hope of successfully overcoming the crisis. On the other hand, landlords are facing a significant decrease in demand for the rental of their property due to the general decline in commercial activity and are forced to reduce rental rates. In the medium term of the lending period, according to the evaluators, it is necessary to take into account both trends.
Based on the foregoing, the appraisers came to the conclusion that in order to determine the final value of the object, the income and comparative approach was assigned specific gravity 0.2 and 0.7, respectively, and cost approach –0,1.
The final market value of appraisal objects is determined by the formula:
C acc. = C doh. *D doh. + C cf. *D cf. ,
where C doh. , From cf. - market values calculated according to the income approach, market approach, rub.;
D doh. , D cf. - respectively, the significance of these methods.
Then the agreed value of the appraised object will be:
Table 20. Calculation of the total market value
| Indicator | Meaning |
| Cost according to the cost approach, rub. without VAT | 1508105 |
| Share by cost approach | 0,10 |
| Cost according to the comparative approach, rub. without VAT | 1215900 |
| Share by comparative approach | 0,70 |
| Cost according to the income approach, rub. without VAT | 119045 |
| Share by income approach | 0,20 |
| Agreed market value, rub. without VAT | 1025749 |
| Total market value, rub. without VAT | 1026000 |
Thus, the market value of the appraisal object - the building of the trade pavilion, located at the address: Tula region, Kimovsk, st. Lenina 52a is: 1,026,000 (One million twenty-six thousand rubles) rubles. excluding VAT.
6. CALCULATION OF THE LIQUIDATION VALUE OF THE OBJECT OF ASSESSMENT
The liquidation value calculation consists of the following steps:
Calculation of net realizable value.
Calculation of salvage value.
6.1 CALCULATION OF NET REALIZATION COST
Net realizable value is determined by the formula:
where NRV is the net realizable value;
RS - the market value of the property;
C – costs associated with the sale of the collateral, %. This article expenses form such expenses as commissions of appraisers and lawyers, consultants, administrative costs until the completion of liquidation, etc. The level of these costs is taken equal to 20% of the received market value.
Kr is the risk compensation coefficient.
The risk compensation ratio is calculated as the ratio of the present value factor for the loan term at the return on investment in real estate to the present value factor for the loan term at the interest rate on the loan.
where d is the discount rate;
i- interest rate on credit. Taking into account the average values of lending rates in banks of the highest reliability category, the loan rate is assumed to be 18%.
n is the term for issuing a loan, in our case it is taken equal to 12 months.
Table 21. Calculation of the net realizable value of the objects of appraisal
| Indicator | Meaning |
| Market value of appraisal objects, rub. | 1025700 |
| Other costs, % | 10,00% |
| Discount rate, % | 21,56% |
| Loan rate, % | 18,00% |
| Loan term, months | 12 |
| Risk compensation coefficient, % | 3,44% |
| Net realizable value, rub. | 887865 |
The liquidation value of the appraised object is calculated by the formula:
,
where LS is the salvage value of the property;
NRV - net realizable value;
t markets is a "reasonably long" exposure period when sold at market price analogues. The exposure period was determined based on the liquidity of this property. According to reviews of the commercial real estate market by Tula agencies, in order for objects similar to the one being assessed in terms of scale and purpose to find their buyer, an exposition period of 3 months is required;
t n - the period at which the forced sale is carried out (at the liquidation value). In accordance with the Instruction of the Central Bank of March 26, 2004 No. 254-P "On the procedure for the formation credit institutions provisions for possible losses on loans, loan and equivalent debts” a loan can be considered secured, in particular, if all legal documentation in relation to the bank’s security rights is drawn up in such a way that the time required for the implementation of the pledge does not exceed 180 days from the date, when the realization of security rights becomes necessary for the bank. The need to exercise collateral rights arises no later than on the 30th day of delay by the borrower of the next payments to the bank on the principal or interest. Taking into account the liquidity of the property being valued, tn is taken in our case in the amount of 30 days (in further calculations - 1 month);
t c - the term of the trial for foreclosure on the subject of pledge. Accounting for this period is necessary due to the fact that the sale of the subject of pledge is possible only after the end of all judicial procedures. The appraisers assumed that the pledge agreement and other documentation under the loan agreement would be executed properly, and the court procedures would take a fairly short period of time - 5 months.
d is the discount rate.
Table 22. Calculation of the liquidation value of the appraised object
Thus, the liquidation value of the appraisal object - the building of the trade pavilion with total area 42 sq.m is 691000 (Six hundred ninety one thousand rubles) excluding VAT.
7. FINAL CONCLUSION ON THE MARKET VALUE OF THE OBJECT
After completing necessary calculations, we can come to the following conclusion:
The market value of the appraisal object - real estate: the building of the trade pavilion with a total area of 42 sq.m, located at the address: Tula region, Kimovsk, st. Lenina 52a is 1,026,000 (One million twenty-six thousand) rubles. excluding VAT.
The liquidation value of the object of appraisal - real estate: the building of the trade pavilion with a total area of 42 sq. m, located at the address: Tula region, to Kimovsk, Lenina st. 52a is 691000 (Six hundred ninety-one thousand) rubles. excluding VAT.
LIST OF USED LITERATURE
1 the federal law"On valuation activities in Russian Federation", dated July 29, 1998 No. 135-FZ
2 Real estate appraisal. Ed. A.G. Gryaznova, M.A. Fedotova. M.: Finance and statistics, 2008
3 Boldyrev V.S., Fedorov L.E. Introduction to the theory of real estate valuation. M., Azbuka, 2007
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Reacted in a way to the need to regulate relations related to the registration of rights to real estate, this regulation long time was far from exhaustive and perfect. Article 131 of the Civil Code of the Russian Federation provided for the need to adopt a law on state registration of rights to real estate and transactions with it. Federal Law "On registration of rights to real estate and ...
Social goals without achieving economic is unrealistic. 3) The results of activities pursuing political goals. Speaking about the goals of managing municipal (state) property, we should not forget about the interests of municipal (state) authorities as a management structure that carries out the process of disposing of municipal property. Obviously, these interests can...
The discount rate (comparison rate, rate of return) is the cost of capital involved, i.e. the rate of expected return at which the owner of the capital is willing to invest. The yield of deposits or other securities, inflation and other similar financial indicators are only indirect data, on the basis of which it is possible to decide on an acceptable return on invested capital for an investor.
There are several ways to calculate the discount rate. Allocate a cumulative and aggregated method for estimating the discount rate.
Aggregated method for calculating the discount rate.
Most often, when calculating investment projects, the discount rate is determined as weighted average cost of capital (weighted average cost of capital - WACC), which takes into account the cost of own (share) capital and the cost of borrowed funds.
WACC \u003d R e (E / V) + R d (D / V) (1 - t c),
where R e is the rate of return on own (share) capital, calculated, as a rule, using the CAPM model;
V = E + D is the total market value of the company's loans and its equity;
To determine the cost of equity, a long-term asset valuation model is used ( capital assets pricing model — CAPM).
The discount rate (rate of return) of equity (Re) is calculated by the formula:
R e \u003d R f + β (R m - R f),
where R f is the risk-free rate of return;
β is a coefficient that determines the change in the price of a company's shares compared to the change in share prices for all companies in this market segment;
(R m - R f) - market risk premium;
R m - average market rates of return in the stock market.
Rate of return on investment in risk-free assets (Rf). As risk-free assets (that is, assets in which investments are characterized by zero risk), government securities are usually considered.
coefficient β. This ratio reflects the sensitivity of the returns on securities of a particular company to changes in market (systematic) risk. If β = 1, then the fluctuations in the prices of the shares of this company completely coincide with the fluctuations of the market as a whole. If β = 1.2, then we can expect that in the event of a general rise in the market, the value of the shares of this company will rise 20% faster than the market as a whole. Conversely, in the event of a general decline, the value of its shares will decline 20% faster than the market as a whole.
Market risk premium (R m - R f). This is the amount by which average market rates of return in the stock market have exceeded the rate of return on risk-free securities for a long time. It is calculated on the basis of statistical data on market premiums over an extended period.
The approach described above for calculating the discount rate may not be used by all enterprises. First, this approach is not applicable to companies that are not public joint-stock companies, therefore, their shares are not traded on stock markets. Secondly, this method will not be able to be applied by firms that do not have sufficient statistics to calculate their β-coefficient, as well as those that are unable to find an analogue company whose β-coefficient they could use in their own calculations. To determine the discount rate, such companies should use other methods of calculation or improve the methodology to suit their needs. It should also be noted that the methodology for estimating the weighted average cost of capital does not take into account the share and cost (most often zero) accounts payable in the structure of liabilities.
Cumulative method for estimating the discount rate is determined based on the following formula:
d = E min + I + r,
where d is the discount rate (nominal);
E min is the minimum real discount rate;
I is the rate of inflation;
r is a coefficient that takes into account the level of investment risk (risk premium).
As a rule, 30-year US government bonds are taken as the minimum real discount rate.
The main disadvantage of this calculation technique is that it does not take into account the specific cost of capital of the company. In fact, this indicator has been replaced by inflation and a minimum yield comparable to government long-term bonds, which has nothing to do with the profitability of the company, the weighted average interest rate (for loans and / or bonds) and the structure of its liabilities.
As you can see, both methods involve the use of a risk premium. The risk premium can be defined in different ways:
- country risk;
- risk of unreliability of project participants;
- risk of non-receipt of project revenues.
Country risk can be obtained from various ratings compiled by rating agencies and consulting firms (for example, the German firm BERI, which specializes in this). The size of the risk premium characterizing the unreliability of the project participants, according to the Methodological Recommendations, should not exceed 5%. The adjustment for the risk of non-receipt of the income provided for by the project is recommended to be set depending on the purpose of the project.
Many components of this methodology are assessed quite subjectively; there is no linkage of the risk premium to the specific risks of the project and taking into account the current activities of the company.
2. The Alt-Invest company (the developer of the software product of the same name) recommends using the following scale of rates based on the aggregated method for calculating the discount rate (using WACC):
Table 1. Methodology for determining the risk premium used by Alt-Invest
|
Characteristics of the project risk source |
risk premium |
WACC + risk premium |
|
Project supporting production: | ||
|
production expansion: | ||
|
entering new markets: | ||
|
related business areas (new product): | ||
|
new industries: |
3. Another example of a scale of risk premiums is the methodology set out in the "Regulations on evaluating the effectiveness of investment projects when placing on a competitive basis centralized investment resources of the development budget of the Russian Federation" (approved by Decree of the Government of the Russian Federation No. 1470 of 11/22/97) .
Table 2. Methodology for determining the risk premium used when placing on a competitive basis centralized investment resources of the development budget of the Russian Federation
However, it should be taken into account that in this methodology, the refinancing rate of the Central Bank of the Russian Federation was taken as the cost of capital (the methodology is focused on the analysis of public investments). For businesses, the risk-free discount rate should be expected to be higher and the risk premiums to be lower, so the methodology is limited to public investment and not suitable for use in a business environment.
Table 3. Influence of individual factors on the value of the risk premium
|
Factors and their gradation |
Increase in risk premium, % |
|
1. The need to conduct R&D (with previously unknown results) by specialized research and (or) design organizations: | |
|
| |
|
| |
|
a) R&D is carried out by one specialized organization | |
|
b) R&D is complex and is carried out by several specialized organizations | |
|
2. Characteristics of the applied technology: | |
|
| |
|
| |
|
3. Uncertainty in the volume of demand and prices for manufactured products: | |
|
| |
|
| |
|
4. Instability (cyclicality, seasonality) of production and demand | |
|
5. Uncertainty of the external environment during the implementation of the project (mining and geological, climatic and other natural conditions, aggressiveness of the external environment, etc.) | |
|
6. Uncertainty in the process of mastering the applied equipment or technology. The possibility for participants to ensure compliance with technological discipline |
This table reflects mainly the risks, one way or another associated with the development of new technology. However, it also contains such risk factors that do not have a statistical pattern of manifestation and, therefore, cannot be predicted. Their impact on the effectiveness of the investment project is unlawful to include in the rate of return. Accounting for such risks in investment design is carried out using other methods: project sensitivity analysis, scenario, break-even point calculation, etc. It is also important to note that maximum size the risk premium is 47%, which, in the author's opinion, is too high even taking into account the specifics of innovation activity.
5. Ya. Honko uses an expert method to determine the aggregate risk premium, i.e. when installed in its entirety. To find out the possible range of differentiation of the risk premium for projects depending on their target orientation, which is directly related to the level of technology used, its novelty and complexity, you can use the generalizations given by him. The following classes of investments have been identified for which it is possible to use different meanings standard rate of return:
1) forced investments - there are no requirements for the rate of return;
2) investments in order to maintain a position in the market - 6%;
3) investments for the renewal of fixed assets - 12%;
4) investments in order to save current costs - 15%;
5) investments to increase income (for new projects in a stable market) - 20%;
6) investments in innovative projects - venture investments (based on new technologies, new approaches, etc.) - 25%.
It is important to pay attention to the fact that the listed classes of investment tasks differ in one feature - the goal pursued by the company, which involves the use of equipment of varying complexity and level. The given data allow us to approach the assessment of the size of the risk premium, which was included by investors in the rate of return in these areas. Considering that the level of the minimum acceptable (risk-free) rate of return abroad is approximately 5% (the benchmark is the yield on a 30-year government loan of the US government), it is possible to determine the size of the risk premium for the listed investment classes by subtracting the value of the risk-free component from the corresponding value of the rate of return ( Table 4):
- Forced investment: the risk premium is 0.
- Investments in order to maintain market positions (this usually includes investments aimed at improving the quality of products, in advertising): 6-5 = 1%.
- Investments for the renewal of fixed assets (meaning that the next generation of equipment is being introduced with the same technology): 12 - 5 = 7%.
- Investments in order to save current costs (this task is usually solved on the basis of new technological solutions and the corresponding system of machines): 15 - 5 = 10%.
- Investments to increase income (here we mean investments aimed at expanding production on a new technological basis): 20 - 5 = 15%.
- Venture investments: 25 - 5 = 20%.
Table 4. Determining the value of the risk premium depending on the class of investments
|
Investment class |
Income rate,% |
Risk premium,% |
|
3 (gr. 2 - 5%) |
||
|
1. Forced investment |
No requirements | |
|
2. Investments in order to maintain market positions (in improving product quality, advertising) | ||
|
3. Investments for the renewal of fixed assets | ||
|
4. Investments to save current costs (based on new technological solutions) | ||
|
5. Investments to increase income (for projects aimed at expanding production on a new technological basis) | ||
|
6. Venture investments (in innovative projects) |
It is important to note that risk premium rates were derived from the rate of return calculation. At the same time, the norm itself may be zero or there may be no requirements for it in the case of forced investments, which, according to the author, is incorrect, since the cost of the company's capital is not taken into account.
Regardless of the choice of risk premium methodology, if the project is calculated taking into account inflation, i.e. Since all cash flows are modeled exactly in the amounts that will actually be received in each stage of the project, then the nominal value of capital is used in the discount rate, without adjustments.
If the project is calculated at constant prices, then the inflation rate must be excluded from the discount rate.
Because, calculating the project at constant prices, the yield is underestimated by the amount of inflation, we subtract from this modeled yield the part that is in real life would be generated by general inflationary growth. Meanwhile, the nominal discount rate is a requirement for the return on invested funds, calculated for fully real cash flows, including, among other things, inflation.
When calculating the project at constant prices, it is necessary to move from the nominal discount rate to the real rate. The value of the real discount rate can be calculated by the formula:
R real = ((1+R nom.) / (1+Level infl.)) -1,
where R is real. is the real discount rate,
R nom. is the nominal discount rate,
Lv. infl is the rate of inflation.
As a simplified version of the calculation, you can use the following formula:
R real = R nom. - Ur. infl.
It should be noted that the calculation in constant prices will not affect the correct assessment of the effectiveness of the project, provided that inflation is taken into account in the discount rate.
After analyzing the methods for calculating the discount rate (rate of return or comparison rate), the author proposes to supplement the methodology for estimating the discount rate through the weighted average cost of capital (WACC), taking into account the risk premium for estimating the discount rate for planning investment projects in entrepreneurial activity in the following way:
WACC \u003d R e (E / B) + R d (D / B) (1 - t c) + R k (K / B),
where R e is the rate of return on equity (equity) capital, calculated using the CAPM model or as return on equity (net profit in relation to the average value of equity for reporting period, expressed as a percentage);
E - market value of own capital (share capital). It is calculated as the product of the total number of ordinary shares of the company and the price of one share;
D - market value of borrowed capital. In practice, it is often determined by financial statements as the company's loans. If this data cannot be obtained, then available information on the ratio of equity and debt capital of similar companies is used;
K - the amount of accounts payable. It takes into account debts to suppliers and contractors, to the organization's personnel, extra-budgetary funds, taxes and fees, debts to other creditors.
B = E + D + K - balance sheet currency;
R d is the rate of return on the company's borrowed capital (the cost of raising borrowed capital). Interest on bank loans and corporate bonds of the company are considered as such costs. At the same time, the cost of borrowed capital is adjusted taking into account the income tax rate. The meaning of the adjustment is that interest on servicing loans and borrowings is charged to the cost of production, thereby reducing the tax base for income tax;
t c - income tax rate.
R k - the cost of using accounts payable. Most often it is zero. In the case of payment of a commodity loan, payment of penalties and fines for late payment, it is necessary to take into account these payments for the reporting period in relation to the average amount of accounts payable for the reporting period, expressed as a percentage.
Thus, it can be noted that the changes proposed by the author in the methodology for calculating the discount rate by means of the weighted average cost of capital make it possible to eliminate the existing inaccuracies in the calculation of the indicator, as well as to test it in a much larger volume, primarily due to the possibility of using it for non-public companies.
Sinadsky V. Calculation of the discount rate // "Financial Director" No. 4, 2003.
On evaluating the effectiveness of investment projects: Guidelines. Approved on 06/21/1999 by the Ministry of Economy, the Ministry of Finance, the State Construction Committee of Russia. Official publication. M.: Economics, 2000.
Set teaching materials on the topic "Practice commercial appraisal and expertise of investment projects in industry”. Alt-Invest LLC, Moscow, 2006, p. 71.
Kasatov A.D. Development of economic methods of managing integrated corporate structures in industry: an investment aspect. M.: Ed. House "Economic Newspaper", 2010. 324 p.
Kasatov A.D. Development of economic methods of managing integrated corporate structures in industry: an investment aspect. M.: Ed. House "Economic Newspaper", 2010. 324 p.
A set of methodological materials on the topic "The practice of commercial evaluation and examination of investment projects in industry". Alt-Invest LLC, Moscow, 2006, p. 71.
Investment rate of return The investment rate of return is an indicator of investment efficiency, defined as the ratio of the present value of future income to the current value of investments.
Glossary of Crisis Management Terms. 2000 .
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