Abstract
Explains that three approaches to valuation under leverage are found in the financial economics literature: weighted average cost of capital (WACC); flow‐to‐equity (FTE) or residual equity income (REI); and adjusted present value (APV). Although both the WACC and the FTE methods have been extensively used in real estate investment analyses, it appears that the APV has received little attention in the real estate literature. This is surprising because the reasons that render the APV preferable to the other two methods exist in most real investment situations. Provides an introduction to the APV method and illustrates it with a numerical example. Discusses potential applications of this method in different real estate investment problems.
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