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Homework answers / question archive / ou are given instruction by the client to determine a freehold golf and country resort located in prime suburb of Petaling Jaya
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ou are given instruction by the client to determine a freehold golf and country resort located in prime suburb of Petaling Jaya. The clubhouse is equipped with facilities such as function rooms, grand ballroom, shopping outlets and sports amenities namely a resort-style larger-than-Olympic-sized swimming pool, 2 play pools, 4 indoor badminton courts & a VIP badminton hall, 12-Lane computerized bowling alley (Brunswick Vector Scoring System), 2 indoor & 4 outdoor tennis courts, 3 squash courts, a futsal outdoor court, aerobics studio, gymnasium, Japanese bath, jacuzzi, sauna, steam bath and many more. The three (3) years statement accounts are as follows:
An analysis of the rate of return for leisure properties is 10% per annum. Using suitable method of valuation and with appropriate assumptions. |
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Broadly, there are three methods of business valuation
Considering the given information is only about the Net Income of the Golf Course, we need to value the business by 2nd Model i.e., Income Approach
The Income based method of valuation is based on the premise that the current value of any business is a function of the future value that an investor can expect to receive from purchasing all or part of the business. In other words, the value of the business must be related to the profits it will earn and the cash it will generate in the future
Income based valuation can be done in 2 ways
DCF takes into account the the present value of the business as a function of its future cash earnings capacity. In this method, the actuary estimates the cash flows of any business after all operating expenses, taxes, and necessary investments in working capital and capital expenditure is being met. Valuing equity using the free cash flow to stockholders requires estimating only free cash flow to equity holders, after debt holders have been paid off.
Given that no data is available to proceed under this method, the 2nd approach is most suitable & possible for valuing this Golf course
Capitalization of earning method - The capitalization method basically divides the expected earnings by the ‘capitalization rate’. The idea is that the business value is defined by the business earnings and the capitalization rate is used to relate the two. This method is more appropriate when it appears that a company’s current operations are indicative of its future operations, assuming of course, a normal growth rate. Under this method a stable level of earnings is divided by a capitalization rate in order to arrive at an operating value for the entity. Where net earnings are being capitalized, the capitalization rate is the net earnings discount rate less the average sustainable growth rate.
Calculation of stable level of earnings
| # | Particulars | Amount |
| a | Gross Profit | 6,00,00,000 |
| b | Opex | -2,06,00,000 |
| c | Profit after Opex (a-b) | 3,94,00,000 |
| d | Operators share (c*40%) | -1,57,60,000 |
| e | Int on capital (4000000*9%) | -3,60,000 |
| f | Rent | -1,50,00,000 |
| g | Cost of Sales | -60,00,000 |
| h | PBT | 22,80,000 |
Therefore on arriving at the income statement, the stable operating profit per annum is RM 22,80,000 p.a.
Capitalization rate for the business = Required Rate of Return = 10%
So, Value of business = 
= RM 22,800,000
Hence, Value of Golf Course under Capitalization of Income Method = RM 22,800,000
