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Business valuations and market efficiency

Asset based valuations

Asset based valuations involve adding up the value of the company’s
assets and deducting the value of any purchased liabilities.

2.1 Alternative asset valuation bases

 Book value

Value is largely a function of depreciation policy.

For example, some assets may be written down prematurely and others
carried at values well above their real worth.

Thus, this method is of little use in practice.

 Replacement value

Useful for the buyer.

If the buyer wants to estimate the minimum price that would have to be paid
to buy the assets and set up a similar business from scratch (especially if
an estimate of intangible value can be added on).

 Breakup value/Net realisable value

Useful for the seller.
2.1 Profit making organisations
Considers the amount they would receive if they were to liquidate the
A company (profit making organisation) has shareholder wealth maximisation as its
business as an alternative to selling the shares.
primary objective. The needs of other stakeholders need to be considered too, since

Also useful for a buyer if their intention is to strip the assets and sell them
off.

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