Question

In: Finance

What are the three important elements of asset valuation?

What are the three important elements of asset valuation?

Solutions

Expert Solution

Asset valuation is the process of assessing the value of a company, real property or any other item of worth, in particular assets that produce cash flows. Asset valuation is commonly performed prior to the purchase or sale of an asset or prior to purchasing insurance for an asset. Asset valuation can be based on cash flows, comparable valuation metrics or transaction value.


A large portion of financial theory is centered around asset valuation. Assets can include stocks, bonds, buildings, equipment and intangible assets such as brands, goodwill and labor. As a result, asset valuation often consists of both subjective and objective measurements. For example, there is no number on the financial statements that tells investors how much the company's brand is worth; brand is an intangible asset and the valuation is subjective. On the other hand, net profit is an objective measurement based on the company's income and expense figures. If a company is looking to acquire another company's assets, it can look at the book value of assets, the market value of assets, and the transaction or replacement value.

asset valuation methods:

When valuing a company, analysts look at the book value of assets and the market value of assets. The book value is generally lower than market value because assets are listed at their historical cost. Common methods for determining an asset's value include comparing it to similar assets and evaluating its cash flow potential. Acquisition cost, replacement cost and accumulated depreciation value are also methods of asset valuation.

One of the most common ways to value assets is based on future cash flows. For example, the value of stock is based on future cash flows from dividends and share price appreciation. The value of bonds is based on the future cash flows of interest payments. The value of commercial real estate is based, in part, on rent. This method only works for assets that produce cash flows. If assets do not produce cash flows, the analyst can conduct a transaction analysis.

Relative and Transaction Asset valuation:

The most liquid assets can be traded on the market and therefore have a market value. Assets that have a market value are valued based on multiples of that value. For instance, stocks are often valued based on a multiple of price to earnings, price-to-book value or price-to-cash flows. These are relative market valuations. Transaction or replacement cost analysis seeks to find deals involving similar assets. This method is good for illiquid assets or assets with no market value. For example, home values go through cycles of demand. The best way to determine a value for your home is to compare it against similar home sales in the same area.


Related Solutions

What are the primary differences among the CF valuation model, asset-based valuation model, and multiples valuation...
What are the primary differences among the CF valuation model, asset-based valuation model, and multiples valuation model?
What are the primary differences among the CF valuation model, asset-based valuation model, and multiples valuation...
What are the primary differences among the CF valuation model, asset-based valuation model, and multiples valuation model?
What are the three most important elements of a service quality program? Give 2 examples for...
What are the three most important elements of a service quality program? Give 2 examples for each when justifying your answer. Please answer in a paragraph or two.
Why is it important to have a balance between the three elements of behavioral control -...
Why is it important to have a balance between the three elements of behavioral control - culture, rewards and incentives, and boundaries? What may be some factors to consider when determining the weight of each of the three factors?
Why is company growth so important in valuation analysis? What difficulties does this bring to valuation...
Why is company growth so important in valuation analysis? What difficulties does this bring to valuation analysis?
What are the three elements of a comprehensive budget?
What are the three elements of a comprehensive budget?
What are the 2 most important elements of cognitive therapy?
What are the 2 most important elements of cognitive therapy?
What is asset accumulation method of company valuation? Please compare asset accumulation, market capitalisation, book value,...
What is asset accumulation method of company valuation? Please compare asset accumulation, market capitalisation, book value, and future earnings methods.
How important to use three approaches in order to triangulate a valuation based on dividends, cash...
How important to use three approaches in order to triangulate a valuation based on dividends, cash flows, and earnings?
What are the three elements that affect the corporate’s value?
What are the three elements that affect the corporate’s value?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT