Income Approach and Discount Rates for Valuing Income-Producing Illiquid Assets - Outlines of New Framework: Revisiting the Concepts in Income Approach and Developing the Model of Illiquid Assets Transactional Pricing

Icfai Journal of Applied Finance, December 2007

Proceedings of the Icfai University and the University of Philadelphia V International Conference on Business and Finance, Hyderabad (India), 2006

38 Pages Posted: 28 Jun 2007 Last revised: 26 Sep 2017

Abstract

This paper offers outlines of a new model for valuing income-producing illiquid assets (stocks of private companies in industries not quoted on public exchanges, intangible assets, income-producing specialized real property etc) where the valuation is for purposes of determining values-in-exchange (as opposed to investment value). In exploring the principle of discounting for such assets this paper makes a departure from equilibrium 'broad-market' thinking characteristic of CAPM-like models (which seem to be mostly applicable in their field of valuing liquid assets, but the transference of which to valuing assets which are involved only in sporadic exchanges is called into question) and offers a formalization of the new principle of 'transaction equilibrium' (which was inspired by the general definition of Market Value contained in the International Valuation Standards). Proceeding from this principle, it is possible to view the rationale for DCF-based exchange valuations at a new angle and offer alternative justifications for compressing general DCF format into particular income capitalization techniques (such as the Gordon Model, Inwood framework etc). Therefore, this paper offers (in Part 2) alternative derivations of those income capitalization techniques, while Part 1 is devoted to formulating discounting procedure which is seen to be more befitting for cases of valuing illiquid assets in transaction equilibrium conditions. Besides, general DCF framework is a multi-period framework which sits badly with one-period discounting techniques (such as CAPM or APT corollaries) which are having wide currency in practical valuations. The proposed discounting technique is explicitly multi-period and has investment behavioral features of presumed buyers/sellers transacting in illiquid assets for its inputs.

Note: The Russian version is available at: http://ssrn.com/abstract=1008875

Keywords: illiquid assets valuation, income approach, discount rates, capital assets pricing model (CAPM), DCF technique, Gordon Model, Inwood model, assumptions of income capitalization techniques

JEL Classification: G11, G12, G14, E37

Suggested Citation

Michaletz, Vladimir Borisovich and Artemenkov, Andrey Igorevich and Artemenkov, Igor Lvovich, Income Approach and Discount Rates for Valuing Income-Producing Illiquid Assets - Outlines of New Framework: Revisiting the Concepts in Income Approach and Developing the Model of Illiquid Assets Transactional Pricing. Icfai Journal of Applied Finance, December 2007; Proceedings of the Icfai University and the University of Philadelphia V International Conference on Business and Finance, Hyderabad (India), 2006 . Available at SSRN: https://ssrn.com/abstract=996016

Vladimir Borisovich Michaletz

Independent ( email )

No Address Available

Andrey Igorevich Artemenkov (Contact Author)

GUU-State University of Management ( email )

99, Ruzyanski Prospect
Haifa, 123060
Israel

Igor Lvovich Artemenkov

State University of Management ( email )

99, Ruzyanski Prospect
Moscow, 123060
Russia

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