VALUATION CONCEPTS AND METHOD! assumption is that the true value of asset is dictated by the market, then intrinsic value equals its market price Unfortunately, this is not always the case. The Grossman - Stiglitz paradox states that if the market prices, which can be obtained freely, perfectly reflect the intrinsic value of an asset, then a rational investor will not spend to gather data to validate the value of a stock. If this is the case, then investors will not analyze information about stocks anymore. Consequently, how will the market price suggest the intrinsic price if this process does not happen? The rational efficient markets formulation of Grossman and Stiglitz acknowledges that investors will not rationally spend to gather more information about an asset unless they expect that there is potential reward in exchange of the effort. As a result, market price often does not approximate an asset's intrinsic value. Securities analysts often try to look for stocks which are mispriced in the market and base their buy or sell recommendations based on these analyses. Intrinsic value is highly relevant in valuing public shares. Most of the approaches that will be discussed in this book deal with finding out the intrinsic value of assets. Financial analysts should be able to come up with accurate forecasts and determine the right valuation model that will yield a good estimate of a firm's intrinsic value. The quality of the forecast, including the reasonableness of assumptions used, is very critical in coming up with the right valuation that influences the investment decision. Going Concern Value Firm value is determined under the going concem assumption. The going concem assumption believes that the entity will continue to do its business activities into the foreseeable future. It is assumed that the entity will realize assets and pay obligations in the normal course of business. Liquidation Value The net amount that would be realized if the business is terminated and the assets are sold piecemeal. Firm value is computed based on the assumption that entity will be dissolved, and its assets will be sold individually — hence, the liquidation process. Liquidation value is particularly relevant for companies who are experiencing severe