HOME

TheInfoList




In
finance Finance is a term for the management, creation, and study of money In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and arms were amputated, in the left corn ...

finance
, valuation is the process of determining the
present value In economics Economics () is a social science Social science is the Branches of science, branch of science devoted to the study of society, societies and the Social relation, relationships among individuals within those societies. ...
(PV) of an
asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
. Valuations can be done on assets (for example, investments in marketable securities such as companies'
share Share may refer to: * Share, to make joint use of a resource (such as food, money, or space); see Sharing * Share (finance), a stock or other financial security (such as a mutual fund) * Share, Kwara, a town and LGA in Kwara State, Nigeria Share ma ...
s and related rights,
business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a business name A trad ...

business
enterprises, or
intangible asset An intangible asset is an asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive econom ...
s such as
patent A patent is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depe ...

patent
s,
data Data (; ) are individual facts A fact is something that is truth, true. The usual test for a statement of fact is verifiability—that is whether it can be demonstrated to correspond to experience. Standard reference works are often used ...
and
trademark A trademark (also written trade mark or trade-mark) is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also r ...

trademark
s) or on liabilities (e.g.,
bond Bond or bonds may refer to: Common meanings * Bond (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of ...
s issued by a company). Valuations are needed for many reasons such as
investment analysis In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availabl ...
,
capital budgeting Capital most commonly refers to: * Capital letter Letter case (or just case) is the distinction between the letters that are in larger uppercase or capitals (or more formally ''majuscule'') and smaller lowercase (or more formally ''minusc ...
,
merger In corporate finance Corporate finance is the area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the firm to the shareholders, ...
and
acquisition Acquisition may refer to: * Takeover, the purchase of one company by another * Mergers and acquisitions, transactions in which the ownership of companies or their operating units are transferred or consolidated with other entities * Procurement, fi ...
transactions,
financial reporting Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to und ...
, taxable events to determine the proper
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...
liability.


Valuation overview

Common terms for the value of an asset or liability are
market value Market value or OMV (Open Market Valuation) is the price at which an asset would trade in a Market (economics), competitive auction setting. Market value is often used interchangeably with ''open market value'', ''fair value'' or ''fair market va ...
,
fair value In accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been call ...
, and intrinsic value. The meanings of these terms differ. For instance, when an analyst believes a stock's intrinsic value is greater (or less) than its market price, an analyst makes a "buy" (or "sell") recommendation. Moreover, an asset's intrinsic value may be subject to personal opinion and vary among analysts. The International Valuation Standards include definitions for common bases of value and generally accepted practice procedures for valuing assets of all types. Regardless, the valuation itself is done generally using one or more of the following approaches; but see also, : #Absolute value models (" Intrinsic valuation") that determine the present value of an asset's expected future cash flows. These models take two general forms: multi-period models such as
discounted cash flow In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available ...
models, or single-period models such as the
Gordon model In finance and investing, the dividend discount model (DDM) is a method of valuing the price of a company's stock based on the fact that its stock is worth the sum of all of its future dividend payments, discounted back to their present value. In ot ...
(which, in fact, often "telescope" the former). These models rely on mathematics rather than price observation. See § Discounted cash flow valuation there. # Relative value models determine value based on the observation of market prices of 'comparable' assets, relative to a common variable like earnings, cashflows, book value or sales. This result will often be used to complement / assess the intrinsic valuation. See § Relative valuation there. # Option pricing models, in this context, are used to value specific balance-sheet items, or the asset itself, when these have option-like characteristics. Examples of the first type are warrants,
employee stock option Employee stock options (ESO) is a label that refers to compensation contracts between an employer and an employee that carries some characteristics of financial options. Employee stock options are commonly viewed as an internal agreement prov ...
s, and
investment Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance Finance is the study of financial institution ...

investment
s with
embedded option An embedded option is a component of a financial bond or other security, and usually provides the bondholder or the issuer the right to take some action against the other party. There are several types of options that can be embedded into a bond. S ...
s such as
callable bond A callable bond (also called redeemable bond) is a type of bond Bond or bonds may refer to: Common meanings * Bond (finance) In finance Finance is the study of financial institutions, financial markets and how they operate within the finan ...
s; the second type are usually
real options Real options valuation, also often termed real options analysis,Adam Borison (Stanford University , mottoeng = "The wind of freedom blows" , type = Private university, Private research university , academic_affiliations = Association of Ameri ...
. The most common option pricing models employed here are the Black–Scholes-
Merton Merton may refer to: People * Merton (surname) * Merton (given name) * Merton (YouTube), American YouTube personality Fictional characters * Merton Matowski, an alternate name for "Moose" Mason, an Archie Comics character * List of Downton Ab ...

Merton
models and
lattice models In physics, a lattice model is a Mathematical model, physical model that is defined on a lattice (group), lattice, as opposed to the continuum (theory), continuum of space or spacetime. Lattice models originally occurred in the context of condens ...
. This approach is sometimes referred to as
contingent claim valuationIn finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available w ...
, in that the value will be contingent on some other asset; see § Contingent claim valuation there.


Usage

In finance, valuation analysis is required for many reasons including tax assessment,
wills Wills is a surname. Notable people with the surname include: * Alec Wills (1911-1941), English cricketer and Royal Air Force officer * Alfred Wills (1828–1912), English High Court judge and mountaineer * Andrew Wills (b. 1972), Australian rules fo ...
and
estates Estate or The Estate may refer to: Law * Estate (law), a term in common law for a person's property, entitlements and obligations * Estates of the realm, a broad social category in the histories of certain countries. ** The Estates, representative ...
,
divorce Divorce (also known as dissolution of marriage) is the optional process of terminating a marriage in Stockholm Marriage, also called matrimony or wedlock is a culturally and often legally recognized union between people calle ...

divorce
settlements, business analysis, and basic
bookkeeping Bookkeeping is the recording of financial transactions, and is part of the process of accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variab ...
and
accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other ob ...
. Since the value of things fluctuates over time, valuations are as of a specific date like the end of the accounting quarter or year. They may alternatively be
mark-to-market Mark-to-market (MTM or M2M) or fair value accounting refers to accounting for the "fair value In accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about econo ...
estimates of the current value of assets or liabilities as of this minute or this day for the purposes of managing portfolios and associated financial risk (for example, within large financial firms including
investment bank Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance Finance is a term for the management, creati ...
s and stockbrokers). Some balance sheet items are much easier to value than others. Publicly traded stocks and bonds have prices that are quoted frequently and readily available. Other assets are harder to value. For instance, private firms that have no frequently quoted price. Additionally, financial instruments that have prices that are partly dependent on theoretical models of one kind or another are difficult to value and this generates
valuation risk Valuation risk is the financial risk that an asset is overvalued and is worth less than expected when it matures or is sold. Factors contributing to valuation risk can include data management, incomplete data, market instability, financial mode ...
. For example, options are generally valued using the Black–Scholes model while the liabilities of
life assurance Life insurance (or life assurance, especially in the Commonwealth of Nations) is a contract between an insurance policy holder and an insurance , insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money upon ...
firms are valued using the theory of
present value In economics Economics () is a social science Social science is the Branches of science, branch of science devoted to the study of society, societies and the Social relation, relationships among individuals within those societies. ...
. Intangible business assets, like goodwill and
intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner o ...
, are open to a wide range of value interpretations. Another intangible asset,
data Data (; ) are individual facts A fact is something that is truth, true. The usual test for a statement of fact is verifiability—that is whether it can be demonstrated to correspond to experience. Standard reference works are often used ...
, is increasingly being recognized as a valuable asset in the information economy. It is possible and conventional for financial professionals to make their own estimates of the valuations of assets or liabilities that they are interested in. Their calculations are of various kinds including analyses of companies that focus on price-to-book, price-to-earnings, price-to-cash-flow and
present value In economics Economics () is a social science Social science is the Branches of science, branch of science devoted to the study of society, societies and the Social relation, relationships among individuals within those societies. ...
calculations, and analyses of bonds that focus on credit ratings, assessments of default risk, risk premia, and levels of
real interest rate The real interest rate is the rate of interest an investor, saver or lender receives (or expects to receive) after allowing for inflation. It can be described more formally by the Fisher equation In financial mathematicsMathematical finance, also ...
s. All of these approaches may be thought of as creating estimates of value that compete for credibility with the prevailing share or bond prices, where applicable, and may or may not result in buying or selling by market participants. Where the valuation is for the purpose of a merger or acquisition the respective businesses make available further detailed financial information, usually on the completion of a
non-disclosure agreement #REDIRECT Non-disclosure agreement#REDIRECT Non-disclosure agreement A non-disclosure agreement (NDA), also known as a confidentiality agreement (CA), confidential disclosure agreement (CDA), proprietary information agreement (PIA) or secrecy agre ...
. It is important to note that valuation requires judgment and assumptions: * There are different circumstances and purposes to value an asset (e.g., distressed firm, tax purposes, mergers and acquisitions, financial reporting). Such differences can lead to different valuation methods or different interpretations of the method results * All valuation models and methods have limitations (e.g., degree of complexity, relevance of observations, mathematical form) * Model inputs can vary significantly because of necessary judgment and differing assumptions Users of valuations benefit when key information, assumptions, and limitations are disclosed to them. Then they can weigh the degree of reliability of the result and make their decision.


Business valuation

Business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a business name A trad ...

Business
es or fractional interests in businesses may be valued for various purposes such as
mergers and acquisitions In corporate finance Corporate finance is the area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the Value investing, value of the firm to the shareholders, ...
, sale of
securities A security is a tradable financial asset A financial asset is a non-physical asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication o ...
, and taxable events. An accurate valuation of privately owned companies largely depends on the reliability of the firm's historic financial information.
Public company A public company, publicly traded company, publicly held company, publicly listed company, or public limited company is a company whose ownership is organized via shares of share capital, stock which are intended to be freely traded on a stock ...
financial statement Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...
s are audited by
Certified Public Accountant Certified Public Accountant (CPA) is the title of qualified accountants in numerous countries in the English-speaking world. It is generally equivalent to the title of chartered accountant Chartered accountants were the first accountant ...
s (USA),
Chartered Certified Accountant Chartered Certified Accountant (designatory letters ACCA or FCCA) is a protected designation awarded by the Association of Chartered Certified Accountants Image:HK Shek Tong Tsui Des Voeux Road West Tram Body Ads ACCA Public Corporate Audit a.j ...
s ( ACCA) or
Chartered Accountant Chartered accountants were the first accountant An accountant is a practitioner of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity ...
s (UK), and
Chartered Professional Accountant Chartered Professional Accountant (CPA; french: comptable professionnel agréé) is the professional designation which united the three Canadian accounting designations that previously existed: :* Chartered Accountant ( CA), :* Certified Gener ...
s (Canada) and overseen by a government regulator. Alternatively, private firms do not have government oversight—unless operating in a regulated industry—and are usually not required to have their financial statements audited. Moreover, managers of private firms often prepare their financial statements to minimize profits and, therefore,
taxes A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...

taxes
. Alternatively, managers of public firms tend to want higher profits to increase their stock price. Therefore, a firm's historic financial information may not be accurate and can lead to over- and undervaluation. In an acquisition, a buyer often performs
due diligence Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care Standard may re ...
to verify the seller's information. Financial statements prepared in accordance with
generally accepted accounting principles Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms oper ...
(GAAP) show many assets based on their historic costs rather than at their current market values. For instance, a firm's
balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such ...

balance sheet
will usually show the value of land it owns at what the firm paid for it rather than at its current market value. But under GAAP requirements, a firm must show the fair values (which usually approximates market value) of some types of assets such as financial instruments that are held for sale rather than at their original cost. When a firm is required to show some of its assets at fair value, some call this process "
mark-to-market Mark-to-market (MTM or M2M) or fair value accounting refers to accounting for the "fair value In accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about econo ...
". But reporting asset values on financial statements at fair values gives managers ample opportunity to slant asset values upward to artificially increase profits and their stock prices. Managers may be motivated to alter earnings upward so they can earn bonuses. Despite the risk of manager bias, equity investors and creditors prefer to know the market values of a firm's assets—rather than their historical costs—because current values give them better information to make decisions. There are commonly three pillars to valuing business entities: comparable company analyses, discounted cash flow analysis, and precedent transaction analysis. Business valuation credentials include the Chartered Business Valuator (CBV) offered by the CBV Institute, ASA and CEIV from the
American Society of AppraisersThe American Society of Appraisers (ASA) is the largest multi-discipline, voluntary membership, trade association representing and promoting their member appraiserAn appraiser (from Latin ''appretiare'', "to value"), is a person that develops an opin ...
, and the CVA by the National Association of Certified Valuators and Analysts.


Discounted cash flow method

This method estimates the value of an asset based on its expected future cash flows, which are discounted to the present (i.e., the present value). This concept of discounting future money is commonly known as the
time value of money The time value of money is the widely accepted conjecture that there is greater benefit to receiving a sum of money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, ...
. For instance, an asset that matures and pays $1 in one year is worth less than $1 today. The size of the discount is based on an
opportunity cost of capital In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods an ...
and it is expressed as a percentage or discount rate. In finance theory, the amount of the
opportunity cost In microeconomic theory Microeconomics (from Greek prefix ''mikro-'' meaning "small" + ''economics'') is a branch of economics Economics () is the social science that studies how people interact with value; in particular, the Produ ...
is based on a relation between the risk and return of some sort of investment. Classic economic theory maintains that people are rational and averse to risk. They, therefore, need an incentive to accept risk. The incentive in finance comes in the form of higher expected returns after buying a risky asset. In other words, the more risky the investment, the more return investors want from that investment. Using the same example as above, assume the first investment opportunity is a government bond that will pay interest of 5% per year and the principal and interest payments are guaranteed by the government. Alternatively, the second investment opportunity is a bond issued by small company and that bond also pays annual interest of 5%. If given a choice between the two bonds, virtually all investors would buy the government bond rather than the small-firm bond because the first is less risky while paying the same interest rate as the riskier second bond. In this case, an investor has no incentive to buy the riskier second bond. Furthermore, in order to attract capital from investors, the small firm issuing the second bond must pay an interest rate higher than 5% that the government bond pays. Otherwise, no investor is likely to buy that bond and, therefore, the firm will be unable to raise capital. But by offering to pay an interest rate more than 5% the firm gives investors an incentive to buy a riskier bond. For a valuation using the
discounted cash flow In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available ...
method, one first estimates the future cash flows from the investment and then estimates a reasonable discount rate after considering the riskiness of those cash flows and interest rates in the
capital markets A capital market is a financial market A financial market is a market (economics), market in which people trade financial Security (finance), securities and derivative (finance), derivatives at low transaction costs. Some of the securities i ...
. Next, one makes a calculation to compute the present value of the future cash flows.


Guideline companies method

This method determines the value of a firm by observing the prices of similar companies (called "guideline companies") that sold in the market. Those sales could be shares of stock or sales of entire firms. The observed prices serve as valuation benchmarks. From the prices, one calculates price multiples such as the price-to-earnings or price-to-book ratios—one or more of which used to value the firm. For example, the average price-to-earnings multiple of the guideline companies is applied to the subject firm's earnings to estimate its value. Many price multiples can be calculated. Most are based on a financial statement element such as a firm's earnings (price-to-earnings) or book value (price-to-book value) but multiples can be based on other factors such as price-per-subscriber.


Net asset value method

The third-most common method of estimating the value of a company looks to the
asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
s and
liabilities Liability may refer to: Law * Legal liability, in both civil and criminal law ** Public liability, part of the law of tort which focuses on civil wrongs ** Product liability, the area of law in which manufacturers, distributors, suppliers, reta ...
of the business. At a minimum, a
solvent A solvent (from the Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as Latium. Through the power of the ...
company could shut down operations, sell off the assets, and pay the
creditor A creditor or lender is a party 300px, '' Hip, Hip, Hurrah!'' (1888) by Peder Severin Krøyer, a painting portraying an artists' party in 19th century Denmark A party is a gathering of people who have been invited by a host A host is ...

creditor
s. Any cash that would remain establishes a floor value for the company. This method is known as the
net asset value Net asset value (NAV) is the value of an entity's asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial i ...
or cost method. In general the
discounted cash flow In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available ...
s of a well-performing company exceed this floor value. Some companies, however, are worth more "dead than alive", like weakly performing companies that own many tangible assets. This method can also be used to value heterogeneous portfolios of investments, as well as
nonprofit A nonprofit organization (NPO), also known as a non-business entity, not-for-profit organization, or nonprofit institution, is a legal entity organized and operated for a collective, public or social benefit, in contrast with an entity that o ...
s, for which discounted cash flow analysis is not relevant. The valuation premise normally used is that of an orderly
liquidation Liquidation is the process in accounting by which a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of ...
of the assets, although some valuation scenarios (e.g.,
purchase price allocationPurchase price allocation (PPA) is an application of Goodwill (accounting), goodwill accounting whereby one company (the acquirer), when purchasing a second company (the target), allocates the purchase price into various assets and liabilities acquir ...
) imply an " in-use" valuation such as
depreciated In accountancy Accounting or Accountancy is the measurement Measurement is the quantification of attributes of an object or event, which can be used to compare with other objects or events. The scope and application of measurement ...
replacement cost new. An alternative approach to the net asset value method is the excess earnings method. (This method was first described in the U.S.
Internal Revenue Service The Internal Revenue Service (IRS) is the revenue service A revenue service, revenue agency or taxation authority is a government agency responsible for the intake of government revenue, including taxes and sometimes non-tax revenue. Depe ...
's ''Appeals and Review Memorandum'' 34, and later refined b
Revenue Ruling 68-609
) The excess earnings method has the appraiser identify the value of tangible assets, estimate an appropriate return on those tangible assets, and subtract that return from the total return for the business, leaving the "excess" return, which is presumed to come from the intangible assets. An appropriate capitalization rate is applied to the excess return, resulting in the value of those intangible assets. That value is added to the value of the tangible assets and any non-operating assets, and the total is the value estimate for the business as a whole. See Clean surplus accounting, Residual income valuation.


Specialised cases

In the below cases, depending on context, Real options valuation techniques are also sometimes employed, if not preferred; for further discussion here see , .


Valuation of a suffering company

When valuing "
distressed securities Distressed securities are securities A security is a tradable financial asset. The term commonly refers to any form of financial instrument, but its legal definition varies by jurisdiction. In some countries and languages people commonly use th ...
", various adjustments are typically made to the valuation result; this would be true whether market-, income-, or asset-based. These adjustments consider: * Lack of marketability discount of shares * Control premium or lack of control discount * Excess or restricted cash * Other non-operating assets and liabilities * Above- or below-market leases * Excess salaries in the case of private companies The financial statements here are similarly recast, including adjustments to
working capital Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capi ...
, deferred
capital expenditure Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure ...
s,
cost of goods sold Cost of goods sold (COGS) is the carrying value In accounting, book value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortizatio ...
, non-recurring professional fees and costs, and certain non-operating income/expense items. In many of these cases, the company in question is valued using real options analysis. This value serves to complement (or sometimes replace) the above value. See and
Merton modelThe Merton model, developed by Robert C. Merton in 1974, is a widely used credit risk model. Analysts and investors utilize the Merton model to understand how capable a company is at meeting financial obligations, servicing its debt, and weighing ...
.


Valuation of a startup company

Startup companies such as
Uber Uber Technologies, Inc., commonly known as Uber, is an American mobility as a service Mobility-as-a-Service (MaaS) is a type of service that through a joint digital channel enables users to plan, book, and pay for multiple types of mobility ...

Uber
, which was valued at $50 billion in early 2015, are assigned
post-money valuationPost-money valuation is a way of expressing the value of a company after an investment has been made. This value is equal to the sum of the pre-money valuation and the amount of new equity. These valuations are used to express how much ownership ext ...
s based on the price at which their most recent investor put money into the company. The price reflects what investors, for the most part
venture capital Venture capital (VC) is a form of private equity Private equity (PE) typically refers to investment funds, generally organized as limited partnerships, that buy and restructure companies that are not publicly traded. Private equity is a ty ...
firms, are willing to pay for a share of the firm. They are not listed on any stock market, nor is the valuation based on their assets or profits, but on their potential for success, growth, and eventually, possible profits. Many startup companies use internal growth factors to show their potential growth which may attribute to their valuation. The professional investors who fund startups are experts, but hardly infallible, see
Dot-com bubble The dot-com bubble, also known as the dot-com boom, the tech bubble, and the Internet bubble, was a stock market bubble Stock (also capital stock) is all of the Share (finance), shares into which ownership of a corporation is divided.Long ...
.
Valuation using discounted cash flows Valuation using discounted cash flows (DCF valuation) is a method of estimating the current value of a company based on projected future cash flows adjusted for the time value of money The time value of money is the widely accepted conjecture ...
discusses various considerations here.


Valuation of intangible assets

Valuation models can be used to value
intangible asset An intangible asset is an asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive econom ...
s such as for
patent valuation Intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of th ...
, but also in
copyright Copyright is a type of intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. ...

copyright
s,
software Software is a collection of instructions Instruction or instructions may refer to: Computing * Instruction, one operation of a processor within a computer architecture instruction set * Computer program, a collection of instructions Music * I ...

software
,
trade secret Trade secrets are a type of intellectual property that comprise formulas, best practice, practices, business process, processes, designs, legal instrument, instruments, patterns, or compilations of information that have inherent economic value be ...
s, and customer relationships. As economies are becoming increasingly informational, it is recognized that there is a need for new methods to value data, another intangible asset. Valuations here are often necessary both for
financial reporting Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to und ...
and
intellectual property Intellectual property (IP) is a category of property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner o ...
transactions. They are also inherent in securities analysis - listed and
private Private or privates may refer to: Music * "In Private "In Private" was the third single in a row to be a charting success for United Kingdom, British singer Dusty Springfield, after an absence of nearly two decades from the charts. Both "In Pri ...
- in cases where analysts must estimate the incremental contribution of patents (etc) to equity value; see next paragraph. Since few sales of benchmark intangible assets can ever be observed, one often values these sorts of assets using either a present value model or estimating the costs to recreate it. In some cases, option-based techniques or
decision tree A decision tree is a decision support A decision support system (DSS) is an information system An information system (IS) is a formal, sociotechnical, organizational system designed to collect, process, store, and distribute information ...

decision tree
s may be applied. Regardless of the method, the process is often time-consuming and costly. If required, stock markets can give an indirect estimate of a corporation's intangible asset value; this can be reckoned as the difference between its
market capitalisation Market capitalization, commonly called market cap, is the market value of a publicly traded company A public company, publicly traded company, publicly held company, publicly listed company, or public limited company A public limited compan ...
and its
book value In accounting, book value is the value of an asset according to its balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of fin ...
(including only hard assets), i.e. effectively its goodwill. As regards listed equity, the above techniques are most often applied in the biotech-, life sciences- and pharmaceutical sectors T. Segal (2020)
Biotech vs. Pharmaceuticals
investopedia.com
(see List of largest biotechnology and pharmaceutical companies). These businesses are involved in research and development (R&D), and testing, that typically takes years to complete (and where the new product may ultimately Approved drug#Approval, not be approved). Securities research#Analyst specialization, Industry specialists thus apply the above techniques (and here especially rNPV) to the Pharmaceutical industry#Research and development, pipeline of products under development, and, at the same time, Aswath Damodaran (N.D.)
The Value of Intangibles
/ref> also estimate the impact on existing revenue streams due to Pharmaceutical industry#Patents and generics, expiring patents. For relative valuation, a specialized ratio is R&D spend as a percentage of sales. Similar analysis may be applied to Option (filmmaking), options on films re the valuation of film studios.


Valuation of mining projects

In mining, valuation is the process of determining the value or worth of a Mineral_rights#Mineral_estate, mining property - i.e. as distinct from a listed mining corporate. Mining valuations are sometimes required for IPOs, fairness opinions, litigation, mergers and acquisitions, and shareholder-related matters. In valuing a mining project or mining property, fair market value is the standard of value to be used. In general, this result will be a function of the property's Mineral resource classification#Mineral reserves and ore reserves, "reserve" - the estimated size and grade of the Ore#Ore deposits, deposit in question - and Mining#Techniques, the complexity and costs of extracting this.Andrew Beattie (2020)
A Beginner's Guide to Mining Stocks
/ref>
"CIMVal"
generally applied by the Toronto Stock Exchange, is widely recognised as a "standard" for the valuation of mining projects. (CIMVal: Canadian Institute of Mining, Metallurgy and Petroleum on Valuation of Mineral Properties ) The Australasian Institute of Mining and Metallurgy, Australasian equivalent i
''VALMIN''
the Southern African Institute of Mining and Metallurgy, Southern African is South African Mineral Reporting Codes#SAMVAL, ''SAMVAL''. These standards stress the use of the Business valuation#Asset-based approaches, cost approach, Business valuation#Market approaches, market approach, and the income approach, depending on the stage of development of the mining property or project. See for further discussion and context, as well as Mineral economics in general, and Mineral resource classification. Analyzing listed :Mining companies, mining corporates (and other :Non-renewable resource companies, resource companies) is also specialized, as the valuation requires a Mineral resource estimation, good understanding of the company’s overall assets, its operational business model :Commodities used as an investment, as well as key market drivers, and an understanding of that :Stock market indices by industry, sector of the stock market. Re the latter, a distinction is usually made based on size and financial capabilities; see . *The price of a “Junior” mining stock, typically having one asset, will at its early stages be linked to the result of its Mining feasibility study, feasibility study; later, the price will be a function of that mine's viability and value, largely applying the above techniques. *A “Major”, on the other hand, has numerous properties, and the contents of any single deposit will impact stock value in a limited fashion; this due to diversification, access to funding, and, also, since the share price inheres goodwill. Typically, then, the exposure is more to the Commodity market, market value of each mineral in the portfolio, than to the individual properties.


Valuing financial service firms

There are two main difficulties with valuing financial services firms.Aswath Damodaran (2009)
''Valuing Financial Service Firms''
New York University Stern School of Business, Stern, NYU
Doron Nissim (2010
''Analysis and Valuation of Insurance Companies''
Columbia Business School
The first is that the cash flows to a financial service firm cannot be easily estimated, since
capital expenditure Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure ...
s,
working capital Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business, organization, or other entity, including governmental entities. Along with fixed assets such as plant and equipment, working capi ...
and debt are not clearly defined: "debt for a financial service firm is more akin to raw material than to a source of capital; the notion of cost of capital and enterprise value (EV) may be meaningless as a consequence." The second is that these firms operate under a Financial regulation, highly regulated environment, and valuation assumptions (and model outputs) must incorporate regulatory limits, at least as "bounds". The approach taken for a DCF valuation, is to then "remove" debt from the valuation, by discounting free cash flow to equity at the cost of equity (or equivalently to apply a modified dividend discount model). This is in contrast to the more typical approach of Valuation using discounted cash flows#Basic formula for firm valuation using DCF model, discounting free cash flow to the ''Firm'' where EBITDA less capital expenditures and working capital is discounted at the weighted average cost of capital, which incorporates the cost of debt. For a multiple based valuation, similarly, PE ratio, price to earnings is preferred to EV/EBITDA. Here, there are also industry-specific measures used to compare between investments and within sub-sectors; this, once normalized by market cap, and recognizing regulatory differences: *Insurance#Insurance_companies, Insurance companies: embedded value and actuarial reserves *Bank#Types_of_bank, Banking sector: net interest margin and Allowance for Loan and Lease Losses, provision for credit losses *Wealth management, Wealth- and investment management firms: assets under management *Investment banks: P/B_ratio#Total_book_value_vs_tangible_book_value, price to tangible book value and return on equity.


Mismarking

Mismarking in securities valuation takes place when the value that is assigned to securities does not reflect what the securities are actually worth, due to intentional fraudulent mispricing. Mismarking misleads investors and fund executives about how much the securities in a securities portfolio managed by a trader are worth (the securities'
net asset value Net asset value (NAV) is the value of an entity's asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial i ...
, or NAV), and thus misrepresents performance.Kent Oz (2009)
"Independent Fund Administrators As A Solution for Hedge Fund Fraud,"
''Fordham Journal of Corporate & Financial Law''.
When a rogue trader engages in mismarking, it allows him to obtain a higher Bonus payment, bonus from the financial firm for which he works, where his bonus is calculated by the performance of the securities portfolio that he is managing. See product control.


See also

* Applied information economics * Appraisal (disambiguation) * Asset price inflation * Business valuation * Business valuation standard * Control premium * Depreciation * Earnings response coefficient * Efficient-market hypothesis * Enterprise value * Equity value * Film finance * Fundamental analysis * Intellectual property valuation * Investment management * Lipper average * Market-based valuation * Minority discount * Paper valuation * Patent valuation * PEG ratio * Present value * PVGO, Present value of growth opportunities * Price discovery * Pricing * Real options valuation * Real estate appraisal * Standard cost accounting * Stock valuation * Sum-of-the-parts analysis * Terminal value (finance), Terminal value * Valuation risk *Specific pricing models ** Capital asset pricing model ** Arbitrage pricing theory ** Black–Scholes (for Option (finance), options) ** Fuzzy pay-off method for real option valuation ** Single-index model ** Markov switching multifractal ** Multiple factor models ** Chepakovich valuation model


References

{{Authority control Valuation (finance), Financial markets Financial economics