Valuations may be needed for various reasons such as investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability.
Since the value of things fluctuates over time, valuations are as of a specific date like the end of the accounting quarter or year.
Additionally, financial instruments that have prices that are partly dependent on theoretical models of one kind or another are difficult to value and this generates valuation risk.
Intangible business assets, like goodwill and intellectual property, are open to a wide range of value interpretations.
Their calculations are of various kinds including analyses of companies that focus on price-to-book, price-to-earnings, price-to-cash-flow and present value calculations, and analyses of bonds that focus on credit ratings, assessments of default risk, risk premia, and levels of real interest rates.
All of these approaches may be thought of as creating estimates of value that compete for credibility with the prevailing share or bond prices, where applicable, and may or may not result in buying or selling by market participants.
Where the valuation is for the purpose of a merger or acquisition the respective businesses make available further detailed financial information, usually on the completion of a non-disclosure agreement.
When correct, a valuation should reflect the capacity of the business to match a certain market demand, as it is the only true predictor of future cash flows.
An accurate valuation of privately owned companies largely depends on the reliability of the firm's historic financial information.
Financial statements prepared in accordance with generally accepted accounting principles (GAAP) show many assets based on their historic costs rather than at their current market values.
In finance theory, the amount of the opportunity cost is based on a relation between the risk and return of some sort of investment.
But by offering to pay an interest rate more than 5% the firm gives investors an incentive to buy a riskier bond.
For example, the average price-to-earnings multiple of the guideline companies is applied to the subject firm's earnings to estimate its value.
This method can also be used to value heterogeneous portfolios of investments, as well as nonprofits, for which discounted cash flow analysis is not relevant.
The approaches to valuation outlined above, are generic and will be modified for the unique positioning and characteristics [4] of the business in question.
Preliminary to the valuation, the financial statements are initially recast, to "better reflect the firm's indebtedness, financing costs and recurring earnings".
As required, various adjustments are then made to this result, so as to reflect characteristics of the firm external to its profitability and cash flow.
Balance sheet items external to the valuation, but due to the new owners, are similarly recognized; these include excess (or restricted) cash, and other non-operating assets and liabilities.
[13] Average pre-money valuations in a particular region or sector, obtained from recent market deals, can also serve as reference points.
[16] As economies are becoming increasingly informational, it is recognized that there is a need for new methods to value data, another intangible asset.
They are also inherent in securities analysis - listed and private - in cases where analysts must estimate the incremental contribution of patents (etc) to equity value; see next paragraph.
These businesses are involved in research and development (R&D), and testing, that typically takes years to complete, and where the new product may ultimately not be approved[18] (see Contingent value rights).
Industry specialists thus apply the above techniques - and here especially rNPV - to the pipeline of products under development, and, at the same time,[16] also estimate the impact on existing revenue streams due to expiring patents.
Mining valuations are sometimes required for IPOs, fairness opinions, litigation, mergers and acquisitions, and shareholder-related matters.
In general,[22] this result will be a function of the property's "reserve" - the estimated size and grade of the deposit in question - and the complexity and costs of extracting this.
[23] [24] CIMVal generally applied by the Toronto Stock Exchange, is widely recognized as a "standard" for the valuation of mining projects.
(CIMVal: Canadian Institute of Mining, Metallurgy and Petroleum on Valuation of Mineral Properties [25]) The Australasian equivalent is VALMIN; the Southern African is SAMVAL.
The second is that these firms operate under a highly regulated environment, and valuation assumptions (and model outputs) must incorporate regulatory limits, at least as "bounds".