Question

Explain how to solve a residual value problem.

Specifically.

• What is the definition of the annual residual with an explanation of how it is calculated.
• What is Book Value?
• How does book value change from year to year?
• What is a dividend payout ratio?
• Once a “residual” is calculated, what more is done to calculate the total value?
• If a problem says that there is no more residual after a certain time, what does that mean?
• What issue does Residual Value share with other valuation methodologies when determining the quality of the results.

Answer 1

Answer :

Depreciation = (value of assets -  residual value of assets) / useful life of asset.

Annual residual value :The residual value is the amount that a company expects to receive for an asset at the end of its service life less any anticipated disposal costs.

calculation annual residual value: The first and foremost option for the assets with the lower value is to undergo a no residual value calculation. Here an assumption is made that these assets have no value at the end of their use date. It is preferred by many accountants, as this helps in simplifying the calculation of depreciation. It is a very efficient method for those assets whose amount of any value comes much below the predetermined threshold level. But the final amount of depreciation that comes by following this method is higher than the times when a residual value is taken into account.

Book Value; Book value is the total amount of company’s physical assets ( excluding patents, goodwill) minus liabilities. So in absolute terms, book value is the net assets of the company.

Change in vbook value ; While the book value of an asset may stay the same over time by accounting measurements, the book value of a company collectively can grow from the accumulation of earnings generated through asset use. generally its is not changes .

Dividend payout ratio;  The Dividend Payout Ratio (DPR) is the amount of dividends paid to shareholders in relation to the total amount of net income the company generates. In other words, the dividend payout ratio measures the percentage of net income that is distributed to shareholders in the form of dividends.

formula : total dividend / total income * 100

problem says that there is no more residual after a certain time it means the no more useble and it has no value left.

Residual Value share with other valuation methodologies;

Comparables method; The comparative method is considered to be one of the most defensive is approaches in order to calculate the residual value. Following is an example of how comparables to value can be calculated: there is a very large market for used cars and one may use the comparables approach in order to calculate the depreciation value on his car, by seeing the current depreciation or residual value of the used car for similar priced car or car of the same company in the current market and the same value can be projected on his car in the future market.

Policy method; Policy method in which company policy will dictate the residual value for the sets when it comes to a certain class. This will be the final value and should be taken as given.

This is also termed as a defensive approach because the policy value may be slightly higher than the current market value and because of this method is also reduce the cost of depreciation for a business. This is the reason why this approach is not followed until the values of policy are kept at a very conservative rate.