Principle underlying valuation

Value of any asset is the discounted value of the future steams of benefit expected from the asset.

• Assets can be real or financial; securities like shares and bonds are called financial assets while physical assets like plant and machinery are called real assets. • The concepts of return and risk, as the determinants of value, are as fundamental and valid to the valuation of securities as to that of physical assets.

Net asset value
Net asset value (NAV) is the value of an entity's assets less the value of its liabilities, often in relation to open-end or mutual funds, since shares of such funds registered with the U.S. Securities and Exchange Commission are redeemed at their net asset value. This may also be the same as the book value or the equity value of a business.

Asset Approach Valuation
• What is it?
• Under the asset approach, the fair market value for the closely held business is determined based on the value of its assets.

• When is it used? • Sometimes a business is only worth what it owns. The asset approach is used for such businesses. Generally, these would include: • Businesses that don't engage in significant activities, like investment or holding companies • Businesses that are generating losses • Businesses that are in (or will be in) liquidation

• How is it used?
An appraiser using the asset approach in its simplest form determines the value of the assets that the business owns, subtracts outstanding liabilities, and concludes that the remainder is what the business is worth. Appraisers are at their discretion in determining if intangibles, fair market values, or liquidation values will be used.Appraisers using the same named approach may use different techniques to determine the value.

• Technical Note: While there are no set definitions for the asset approach, there are some general methods that your appraiser might use: • Adjusted net assets method: Determine value of assets and subtract liabilities • Adjusted book value method: Determine book value of assets, then add value of intangible assets • Liquidation value: Determine value that assets could be sold for in a liquidation sale

• Net assets method:

• The formula for NAV is: • NAV = (Market Value of All Securities Held by Fund + Cash and Equivalent Holdings - Fund Liabilities) / Total Fund Shares Outstanding

• Let's assume at the close of trading yesterday that a particular mutual fund held $10,500,000 worth of securities, $2,000,000 of cash, and $500,000 of liabilities. If the fund had 1,000,000 shares outstanding, then yesterday's NAV would be: • NAV = ($10,500,000 + $2,000,000 $500,000) / 1,000,000 = $12.00

Book value method:

Net book value is the value at which a company carries an asset on its balance sheet. It is equal to the cost of the asset minus accumulated depreciation. Formula for net book value: Net Book Value = Cost of the Asset Accumulated Depreciation

• Assume Company XYZ bought MegaWidget for $100,000 three years ago. The MegaWidget depreciates by $10,000 a year. Thus the net book value of the MegaWidget is: $100,000 - $10,000 (year 1 depreciation) $10,000 (year 2 depreciation) - $10,000 (year 3 depreciation) = $70,000.

Liquidation value:

• The liquidation value of a business is determined by estimating the value of company assets that can be sold under distress less the liabilities of the business. It is a business valuation that is used when a company is facing severe financial difficulties. Bankruptcy courts often require a business liquidation value to determine the bottom-line worth of a company that can be paid to creditors upon dissolution.
• Liquidation Value = Total Assets - Total Liabilities

Book Value Assets Cash Accounts receivable Inventory Fixed assets Total assets Liabilities Bank debt Accounts payable Total liabilities Shareholders equity $15,000 $35,000 $50,000 $50,000 $150,000 Liquidation Value $15,000 $23,000 $27,000 $25,000 $90,000

$30,000 $15,000 $45,000 $105,000

$30,000 $15,000 $45,000 $45,000

Total liabilities and shareholders equity $150,000 $90,000 You can see that the asset values dropped considerably up revaluation based on their worth on the open market. After liabilities have been paid off from the asset liquidation, shareholders are left with a $60,000 loss.