2Financial Modeling - www.neteffect.in
Note, however, that it is possible to achieve the fair market value for a business asset that is beingliquidated in its secondary market. This underscores the difference between the standard and premiseof value.These assumptions might not, and probably do not, reflect the actual conditions of the market inwhich the subject business might be sold. However, these conditions are assumed because they yielda uniform standard of value, after applying generally-accepted valuation techniques, which allowsmeaningful comparison between businesses which are similarly situated.Elements of business valuationEconomic conditionsA business valuation report generally begins with a description of national, regional and localeconomic conditions existing as of the valuation date, as well as the conditions of the industry inwhich the subject business operates. A common source of economic information for the first section of
the business valuation report is the Federal Reserve Board’s Beige Book, published eight times a year
by the Federal Reserve Bank. State governments and industry associations often publish usefulstatistics describing regional and industry conditions.In finance,
is the process of estimating the potential market value of a financial asset orliability. Valuations can be done on assets (for example, investments in marketable securities such asstocks, options, business enterprises, or intangible assets such as patents and trademarks) or onliabilities (e.g., Bonds issued by a company). Valuations are required in many contexts includinginvestment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxableevents to determine the proper tax liability, and in litigation.
Valuation of financial assets is done using one or more of these types of models:1.
Relative value models determine the value based on the market prices of similar assets.2.
Absolute value models determine the value by estimating the expected future earnings fromowning the asset discounted to their present value.3.
Option pricing models are used for certain types of financial assets (e.g., warrants, put options,call options, employee stock options, investments with embedded options such as a callablebond) and are a complex present value model. The most common option pricing models are theBlack-Scholes-Merton models and lattice models.Common terms for the value of an asset or liability are fair market value, fair value, and intrinsic value.The meanings of these terms differ. The most common sets market price. For instance, when an analystbelieves a stock's intrinsic value is greater than its market price, the analyst makes a "buy"recommendation and vice versa. Moreover, an asset's intrinsic value may be subject to personal opinionand vary among analysts.For a comprehensive discussion on financial valuation see Aswath Damodaran,
,(New York: John Wiley & Sons, 2002).