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L9 Valuation of Land and Redevelopment

# 5 bill s 20 risk free r a t e r 5 usa ble ar ea aft

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Unformatted text preview: property value exceeds construction cost at time τ. Effect of Pricing Variables The 5 pricing variables for the option pricing approach are: Property Value S Property Risk σ Construction Cost R Risk-free interest rate r Time limit to develop τ S R τ r σ V V V V V Case Analysis: OPM Approach We are going to apply both OPM and DCF approach to valuing the following 2 land sites: Ng Chi Wan (Fung Sing Street) Ma On Shan (Section 9B) V = SN (d1 ) − Re − rτ N (d 2 ) d1 = ln(S / R) + (r + σ 2 / 2)τ στ d 2 = d1 − σ τ Case Analysis: OPM Contd Nga Chi Wan (Fung Sing Street) Con st r u ct ion Cost (R ) = \$0.5 bill; σS = 20%; Risk-free r a t e (r ) = 5%; Usa ble Ar ea Aft er Const r u ct ion = 703,966 sq. ft.; τ = 3 year s \$Price/sq. ft. S (\$bill) d1 d2 N(d1) N(d2) 2400 1.690 4.12 3.77 0.999981 0.999920 2600 1.830 4.35 4.01 0.999993 0.999969 2800 1.971 4.57 4.22 0.999998 0.999988 3000 2.112 4.77 4.42 0.999999 0.999995 3200 2.253 4.95 4.61 1.000000 0.999998 V 1.259 1.400 1.541 1.682 1.822 Note: S = Value of Building = \$Price/sf * Usable Area/1 billion Recall DCF Approach \$Rent per sf 18 19 20 21 22 23 R 0.5 0.5 0.5 0.5 0.5 0.5 g 6% 6% 6% 6% 6% 6% r 0% 0% 0% 0% 0% 0% NOI 0.1521 0.1605 0.1690 0.1774 0.1858 0.1943 N 50 50 50 50 50 50 k 14% 14% 14% 14% 14% 14% T* -12.6 -13.5 -14.4 -15.2 -16.0 -16.7 V(T*) 2.195 2.490 2.807 3.145 3.506 3.889 V(T=0) 1.366 1.470 1.573 1.677 1.781 1.884 V = SN (d1 ) − Re − rτ N (d 2 ) d1 = ln(S / R) + (r + σ 2 / 2)τ στ d 2 = d1 − σ τ Case Analysis: OPM Co...
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