Residual Valuation for Goliath - Research Proposal Example

 Residual Valuation for Goliath Introduction Scholars refer to the process of valuing land and other permanent assets that carry the development potential as Residual Valuation. It is possible to calculate the amount of money available for purchasing a give asset such as land from the value of land with complete development. It takes place after removing the cost of development from the value inclusive of profits. It only becomes complicated when calculating inflation, interest, finance terms, and cash flow against a programme timeframe. Goliath ought to evaluate development costs that include building costs, sales and marketing costs, professional fees, contingency, financing, costs of acquiring land, as well as other subsidiary costs. Gross Development Value Eckersely Costs of building constitute the largest risk on the side of costs under residual evaluation. In the United Kingdom for instance, the Building Cost Information Service publishes building cost information after every three months. It is essential to understand that it is a service accessed after subscription. Among other types of information, BCIS gives insights of historical cost information on various buildings. The national average tender prices that remain restricted to external works forms the basis of providing information in addition to VAT and fees (Veil & Ahmling 2013). Depending on the location, authorities always adjust all the charges. Goliath should take the initiative to confirm the basis of published cost of information especially at Preston, the gross geographical external area. Components include common parts as well as net lettable regions. It is possible that Preston could be charging a difference of up to twenty percent. The project management fees charged on external projects as well as the design team vary with an average of fifteen percent difference on professional fees. Fit out fees and refurbishment remain always higher compared to fees charged on new structures. Additional fees come on top of design fess and emanate from various sources (Bowerman & Van Wart 2011). The sources include feature lighting, landscaping, safety and health consultancy, building regulations approvals, planning consultancy, auditory consultancy, interior design, traffic modelling, environmental impact assessment (EIA), Building Information Modelling, as well as site inspectors. It is common to factor fees charged on management of construction exercises under the cost of building. The tradition in residual valuation is applying an average of seven percent contingency allowance depending on estimates of costs of building. It takes care of cost risks and unpredictable circumstances. Drivas Jones Redesigning mitigates unforeseen risks provided construction contracts remain in place. On finance, Goliath, the developer should apply seed capital to fund everything during the appraisal stage. It includes among other things design work required in obtaining consent of planning. In the absence of planning risks and those associated with appraisal, the conditions of loans become more affordable (Aiken 2010). Through this Goliath could resort to banks and other financial institutions for money to use in construction and other development process of the site. The management at Goliath should include draw down facilities and agreed rates of interest in the contract. Rates of interest are variable, fixed, and others capped. When predicting expenditure with considerations of cash flow against a set programme, analysts could use S curves efficiently. It is advisable to have sufficient draw down facilities with specific targets to meet monthly valuations of the contractor. It helps to in helping the developer prevent the employer from breaching the contract conditions. Goliath should base calculations of residual value on getting all professional and drawing down payments by the time the project reaches the two-thirds level. It keeps the developer away from risks associated with payment defaults. The company will retain five percent retention fee from the contractor. Half of the retained money goes to the contractor after completing the structure while the remainder goes after the stipulated defects liability period. It is the discretion of Goliath to hire the services of a professional team to conduct due diligence to facilitate an enhanced understanding of project risks and make supervision on loan agreements to sign. Jones Slang Lassalle On many occasions, promotional marketing consumes one percent of the value attached to development. It entails giving permission to agents to get the tradition ten percent of the total rental income of the first year. Alternatively, they could receive two percent of total sales revenue (Burns 2010). On major schemes, such as the one pursued by Goliath, an opportunity exists to use competition to bargain on the proposed figures. Ancillary costs are many and include Void costs between building completion and achieving total rental income. This might include insurance, interest, cleaning, rates, fuel, maintenance, and security Planning fees Enabling Demolition and works such as service diversions or site clearance Exhibition and Public consultation models Planning obligations, and Planning conditions the community infrastructure levy Third party fees, such as party wall surveyor or lawyers Topographical surveys Geotechnical investigation such as boreholes and trial pits Public utility charges Legal costs on sales or leases Site decontamination Costs of Archaeology (Giuliani & Kurson 2002) HDAK It is essential that the activity-based costing analysis technique applied in calculating the breakeven even point have figures with utmost accuracy. The breakeven point of a good rises with increase in the production of the same product. Scholars utilise new variable cost inputs and new fixed costs to determine a new breakeven point. Gross Development Cost Costs incurred to acquire land also cover all compensation necessary to access vacant possession as well as all taxes. Goliath will calculate the gross development value by multiplying the yearly rent by the purchase in a year at a yield appropriate to the form of property in Preston. The company could spend a-half-a-million pounds on rent that yields at seven percent. It will provide an annual purchase of 13.30 therefore, capital value of more than six million pounds. Deducting the costs of the buyer including fees charged on legal fees and stamp duty from the gross amount gives the company the net value of development. Goliath should also consider the development timeframe. The company should estimate the duration the project would take to conclude. Specific areas are incurring expenses throughout the project. The programme influences all elements of cost. Market value at Preston The variation in the prices of houses influences economics of development greatly. This agency carried out a thorough evaluation of house prices around Preston using the Preston Land registry information to identify the markets within the region. The prices of houses in Preston form the foundation for new developers. Testing Assumptions The testing took place on an average of one-hectare site across the UK. The agency defined various development mix features while undertaking viability testing. They also applied different assumptions acceptable to the council. The evaluation of typical developmental mixes guided the chosen scenarios. After the analysis, the agency found the following mixes and densities (Plunkett 2007). 80 dph: including 20% 1-bed flats; 10% 3 bed terraces 20% 2 bed terraces and 50% 2 bed flats. 30 dph: including 10% 2 bed flats; 15% 2 bed terraces; 20% 3 bed terraces; 10% 4 bed detached; 15% 3 bed detached; 25% 3 bed semis; 5% 5 bed detached 50 dph: including 5% 1-bed flats; 10% 4 bed detached 15% 2 bed terraces; 20% 3 bed terraces; 20% 3 bed detached; 10% 2 bed flats; 20% 3 bed semi-detached. The experts calculated the residual value of the project for every element (within the base matrix) scenarios along with an increased group of assumptions (Mikler 2009). The results were 30%, 25 %, 20%, 15%, and 10% across affordable houses. Testing Social Rent was at 70 % and purchases of new houses at 30%. The assumption for the new-build purchase was a staggering 40%. Experts assumed a nil grant where such application was not stated. Contributions from Goliath Analysts allocated a total tariff cost of five thousand pounds to Goliath, the developer. They also evaluated the influences on residual value with the assumption of ten thousand pounds as the tariff for each unit. The analyst also considered the new approach by the UK Government to contributions by new developers such as Goliath factored under the Community Infrastructure Levy (Warner 2010). The policy recommends that new tariffs levied on new buildings as well as reducing the scope of applying Section 106 dealing with planning duties. (Harold, 2012) Evaluating the product mix helps in generating the individual breakeven point for every unit. In the context of Developer, we divide the land by the totals as well as dividing the project with the totals. The result is the $ 181.71 as the weighted margin. The required sales of every unit is 2201 arrived at after dividing the fixed cost $399, 943 by $ 181. 71, representing the value for the breakeven point. The weighted mean with land covering sales of 900 is also almost twice the sales of the project at 500 (Halpern 2005). For every land sale, the individual unit costs $ 221 while the project sale for each unit is $ 111. On the other hand, the mean contribution margin stands at $ 181. 71. For the net earnings to remain regular, Goliath would have to engage in more sales that would lead to a breakeven point. Yield Goliath will apply a residual development appraisal framework to evaluate the viability of development. The model imitates the system of virtually all proprietors when acquiring the land (Khanh 2011). First, this framework preludes that the value of the land (site) remains the difference between the costs of development and income from the project. The framework considers the influence on the scheme residual value associated with affordable housing and other contributions for Goliath. Getting the gross residual revenue of the project entails deducting costs of the project from the total revenue. The gross residual value forms the primary point for negotiating the scope and level of contributions by Goliath. The greatest contributions are making housing affordable besides minimizing the entire residential value of the site. Income Valuation Residual Income Residual Income Calculations Total assets 5, 000, 000 EBIT 400, 000 Debt-to-total capital ratio 0.6 Cost of debt (before tax) 8% Cost of equity 12% Tax rate 40% EBIT 400, 000 Less rate of interest 240, 000 Pretax Income 160, 000 Less Income tax Expense 64, 000 Net Income 96, 000 Equity Capital 2, 000, 000 Equity charge 240, 000 Net Income 96, 000 Less equity charge 240, 000 Residual income 144, 000 Related Measures NOPAT = Net operating profit after taxes C% = Cost of capital TC = Total capital (Great Britain 2007) Uses of Residual Income Measuring Goodwill Impairment Valuation (Hill & Jones 2007) Determining Executive Compensation Measuring Internal Corporate Performance Predicting Residual Income 0 1 2 Revenue 2.5 3.0 Dividends 1 1.11 Book value 20 Expected Equity return 10% Two-year forecast End-of-Year Book Value for Year 1 = Start-of-year book value + Earnings – Dividends $20.00 + $2.50 – $1.00 = $21.50 Beginning book value for year 2 (Hornuf 2012) Charge for Equity Capital in 2nd = Expected return on equity × Beginning book value per share 10% × $21.50 = $2.15 Residual Income in Year 2 = $3.00 – $2.15 = $0.85 Profit The breakeven represents the distinction between a business that follows the profit making path and the one that is on the insolvency way. The developer should consider carrying out breakeven analysis it is fundamental to its growth and success or Goliath failure. It is likely that Goliath could have an incorrect breakeven point if it has in accurate or incorrect information and in the process end up having units sold at a loss. Such practices ultimately result in the insolvency of the business organization. Accountants apply the excel spreadsheet when determining the breakeven point for Developer. Fixed Cost / (Unit Price - Variable Unit Cost) Sales price – variable costs = input margin.(Harold, 2012) Fixed Costs + Variable Costs = Breakeven Sales Dollars The process of analysing the breakeven point constitutes various variables: The selling price of every products; the pre-designed market value for sales form all the units Totals of Fixed Costs, the activity-based technique of production for every unit. It is necessary for Goliath to know that this amount is always fixed. Totals of Variable Costs; they include anticipated total costs of production among them all the variables (Warner 2010). Unit Cost variables; they are all expenses beyond management production that always remain unanticipated. Forecast of net profit; they constitute total revenue less total cost. . (Harold, 2012) It remains critical to know that production cost represents the breakeven point. When Developer, releases to the market many products that are also different, its middling margin of contribution(input)for every unit applies in determining the fixed cost of the product in question. It is crucial to realise that the weighted average as well as the average carries a contribution margin. The weighted average weighs the expenses Goliath would invest to generate the products and release them to the market including conducting all marketing aspects. Calculating the specific cost of products is ineffective using the traditional costing technique. To give birth to bone activity, experts divide the cost of goods and the finished products. Professionals get the exact expense incurred in line of production using many activities when applying the activity-based costing system. Goliath needs to understand that the current business environment has stiff competition therefore, adopting and executing the new systems of production and accounting lies at the foundation of Goliath enjoying appropriate profits. The Developer should apply two strategies that are replacing the activity-based accounting method and the just-in-time strategy to enhance Goliath’s return on investment. The two strategies will minimize excess inventory to great percentages. The systems will enhance consistency in various parts of production while eliminating the accumulation of excess parts in the whole exercise of production. The just-in-time strategy will concentrate on improving the production process if executed correctly. Streamlined areas would include efficiency, manufacturing lines, and quality. However, the VP ought to comprehend and embrace the fact that enhancing production requires and encompasses the involvement of employees to facilitate quality and flow (Cooper & Kaplan 1991). Accuracy in costing finished products only requires the application of activity-based costing. Professional accountants prefer using the activity-based accounting technique during high amounts of overhead costs with too many of the parts remaining. Clearly, the accuracy of products costing remains of the essence. Once the evaluation of final figures of costs of goods remains low, then the assumption is that the operations of Goliath remained efficient. On the contrary, when Goliath remained with many parts, then a lot of money was lost (Warner 2010). The traditional cost accounting method is inadequate when the Developer, Inc aims at understanding the actual cost incurred during the whole production process especially for particular clients. The reason behind the development of the activity-based accounting method was to eliminate the shortcomings of the traditional method of costing (Dasgupta & Serageldin 2000). In place of one cost driver used by the traditional method such as machine time, the activity-based method will apply several cost drivers in apportioning the indirect costs of the manufacturer. The new method will use cost drivers including the total number of machine time, the number of engineering modification orders, and the weight of materials used in the production process. Increase in overhead costs as well as a range of various products in the line of production influences the continuing increase among professional accountants and companies using the activity-based accounting method. In fact, modern companies and organizations do not apply the direct labour hours and machine time in accounting, which is also evidence that activity-based costing is the present standard accounting method. Bibliography Aiken, Carolyn. 2010, Transformational Leadership. Chicago: McGraw-Hill Publishers. Bowerman, K. D., & Van Wart, M., 2011, The business of leadership: an introduction. Armonk, N.Y., M.E. Sharpe. Burns, J. M. G., 2010, Leadership. New York: Harper Perennial. Cheltenham, UK, Edward Elgar. Cooper, R., & Kaplan, 1991, The Design of Cost Management Systems: Text, Cases, and Readings. Prentice Hall Dasgupta, P., & Serageldin, I., 2000, Social capital a multifaceted perspective. Washington, D.C., World Bank Giuliani, R. W., & Kurson, K., 2002, Leadership. New York: Hyperion. Great Britain. 2007, Success and failure in the UK car manufacturing industry. London, The Stationery Office. Halpern, D., 2005. Social capital. Cambridge, Polity Harold, A. (2012). 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G., 2010, Strategic analysis and choice a structured approach. New York, Business Expert Press. http://www.books24x7.com/marc.asp?bookid=40262. $5,000,000 .00 $400,000 .00 0 .60 8 % 12 % Read More