WFU Law School
Law & Valuation
Chapter 4- Securities Valuation

Chapter 5 - Business Valuation

There are three principal techniques for valuing a business:

Asset method. How much was paid, or would be paid, for the assets of the business? Book value is an accounting measure of historic value; liquidation value focuses on a market measure of assets.

Income method. What is the present value of the estimated future returns from the business? Discounting cash flows or capitalizing earnings are two methods.

Market method. What do others pay for similar assets or returns? Valuations of comparable businesses can be used to extrapolate the value our business.

Of course, that is not the whole story. After determining the overall value of the business, adjustments are often appropriate to reflect the value of control and liquidity rights -- or the lack of these rights. Finally, no valuation is perfect, but it is always wise to check for some common and avoidable errors.

Chapter Subsections
Common Errors
Application in Legal Contexts

 

“One hundred thousand lemmings
cannot all be wrong”

  • Myth 1: A valuation is an objective search for “true” value
    • Truth 1.1: All valuations are biased. The only questions are how much and which way.
    • Truth 1.2: The direction and magnitude are directly proportional to who pays for the valuation.
  • Myth 2: A good valuation provides a precise estimate of value
    • Truth 2.1: There are no precise valuations.
    • Truth 2.2: Its usefulness is greatest when the valuation is least precise.
  • Myth 3: The more quantitative a valuation model, the better.
    • Truth 3.1: Understanding a valuation is inversely proportional to the number of inputs.
    • Truth 3.2: Simpler valuation models do better than complex ones.

Aswath Damodaran
NYU Stern School of Business
class notes

 

Chapter 4- Securities Valuation

©2003 Professor Alan R. Palmiter

This page was last updated on: March 28, 2005