Capex to be used or not in Capitalization of Earnings Method?
Hi,
I was curious to find out if capex should be used in a capitalization of earnings method or not. Reason I ask is because I know that it is the norm the equate capex and d&a in the terminal year of a dcf (netting each other out) and then capitalize the cash flow net of w/c investment. By using that same logic, one could say that in a pure cap earnings method, capex should not be factored in. Is there a definitive agreement in the community of what is right or wrong?
Thank you!
if this is a RE asset valuation and youre using cap rate and talking about NOI, then NOI is not net of capex.
It's for a company valuation.
The cap rate is basically the gordon growth dividend model formula. Your cash flow is a normalized free cash flow that you are assuming will be consistent and grow in your perpetuity at your select discount rate. Normalized free cash flows are net of capex in the DCF and thus IMO should be net of capex in this methodology as well. If you don't subtract it then you're overstating the normalized cash flows.
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