When trying to understand the concepts of legal and financial jargon, the term “capitalized value” may cause confusion. Capitalized value, or in other words the value of an investment or asset after it has been capitalized, can have a variety of meanings depending on the field it is being used in. But in most cases, capitalized value is a factor in either equity valuation or the cost of an asset.
Equity valuation is the process of estimating the potential market value of a company or entity. This process generally involves looking at the market value of the company’s assets, liabilities, and any changes that have recently occurred or are likely to occur in the future. By capitalizing an equity’s present value, investors are able to assess future potential profitability. The capitalized value of equity is a critical factor in determining the current market value of the company or stock and of the future potential profitability.
The cost of an asset is determined through various methods, including capitalization. Capitalized cost is a method used to calculate the present value of an asset’s future potential returns by examining the cost of money invested into that asset. The capitalized cost of an asset takes into consideration expected cash flows as well as the time value of money to determine its overall value.
Example of Capitalized Value
For example, let’s say an investor purchases an apartment complex and puts down $300,000 to purchase the property. The capitalized value of the property would be the total of the cash flows the investor expects to receive over the life of the investment. This includes expected future cashflows, such as rents from tenants or from the sale of the property at the end of the hold period, as well as the cost of capital, or any loans the investor took out in order to purchase the property.
In this scenario, the investor’s capitalized value might be determined by taking the total cost of the investment (the $300,000 the investor put down) plus the expected returns (the rents and sale of the property in the future) and subtracting the cost of capital. Once all of these variables have been taken into account, the resulting value would be the capitalized value of the property.
Clearly, capitalized value is a complex concept but it is important to gain an understanding of it to properly assess investments and assets. By capitalizing an asset or investment, you are better able to understand its present and future value. Keep in mind that the capitalized value of an asset can fluctuate over time due to changes in expected cash flows and cost of capital.