a short period of time) depending upon the particular circumstance
. Thesevariations affect the benefit that any particular individual perceives he would gainfrom the ownership of the object or receipt of the service, and hence his perceptionof its value-in-use at the seller’s price. When considering an individual object or service, its value therefore lies in the eye of the buyer and, although the price in atransaction may be set by the seller, value may only be determined by the buyer according to his individual circumstances, preferences and expectations (Tucker 2002).Assuming that the business has a viable product or service to offer to the market,and that at least some of its target market perceive this to have value, the firm willmake sales and generate revenues. Each and every product or service sold by thefirm throughout its life thus makes some contribution to the cash that may bedistributed amongst the firm’s owners once it has paid all its costs and taxes. It is theanticipated existence of this cash flow from future sales that creates the value of thefirm to its owners. The
of the business is therefore the sum of itsexpected future after-tax cash flows (i.e. the revenues expected to be generatedfrom its sales less the cost of the assets and other inputs used in their creation, andof the business entity itself), adjusted by a discount rate that appropriately reflectsthe relevant risk of the business, its products and its markets (McCarthy 2004).For privately-held businesses, their shareholder value is equal to the intrinsic value,however for publicly-listed companies their shareholder value is determined by thecapital market in which the shares are traded, and the company has a fluctuating“
” which is simply the share price at any time multiplied by the number of shares outstanding at that time. In a perfect capital market, i.e. one where allinformation is immediately reflected in the share price of the company, the marketvalue (and hence the shareholder value) equals the intrinsic value. In real lifehowever, the two may differ (in some cases markedly), either due to inefficiencies
For example, an adventurous traveler whose boat develops a serious leak when crossing acrocodile- infested river will not place any value on the water which threatens to sink him, but wouldpay almost unlimited amounts for fuel to run his boat’s pump to keep him afloat until he can berescued or make it safely to shore. Conversely, the same adventurer whose 4WD breaks down whentraversing a sandy desert later in his travels will value the extra fuel he carries far less than he woulda supply of drinking water. The same two products, being employed by the same person, but havingdifferent values at different times due to different external circumstances.