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Article: The similarities of valuing real estate and bonds, and the diversification benefits of investing in real estate.
- Article from:
- Appraisal Journal
- Article date:
- July 1, 1996
- Author:
CopyrightCOPYRIGHT 1996 The Appraisal Institute. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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According to the dividend discount model (DDM), the intrinsic value of a stock ([P.sub.0]) equals the present value of all future dividends discounted at the stockholder's required rate of return (k) and growing at a constant rate (g). Mathematically, the model is:
[P.sub.0] = [D.sub.1] / (k - g)
The cap rate model to real estate valuation looks very similar to the DDM and is:
V = NOI/capitalization rate
where:
V = intrinsic value of the investment
NOI = net operating income capitalization