Asset valuation is the calculation of the fair market or present value of a given business asset. Assets can be tangible like buildings and computers, and intangible like brands and patents. Each of these has a given value examined through techniques such as using book values, option pricing models or comparables, and absolution valuation models such as discounted cash flow analysis.
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Asset valuation is done for a wealth of purposes, such as investment analysis, capital budgeting, financial reporting, merger and acquisition transactions, determining proper tax liability, as well as litigation. There are three types of value of an asset or liability: fair market value, fair value, and intrinsic value. For instance, the intrinsic value is mostly subject to personal opinion and may vary from one analyst to another.
Asset valuation is done using one or more kinds of models. Absolute value models, for example, determine the present value of an asset’s future cash flows. It could be multi-period models (e.g., discounted cash flow models) or single-period models, and both rely on mathematics instead of mere price observation. Relative value models, on the other hand, determine value based on observing market prices of similar assets.
When a plant asset is bought using cash, the acquisition cost is simply the agreed-on cash price. But when a firm acquires plant assets in exchange for other non-cash assets such as stock shares, it’s more difficult to establish a cash price. This makes it important and critical to undertake asset valuation with an expert eye.
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