Financial value (valuation
of assets and investments)

Potential value of ownership

A financial asset (and a financial project / investment) is normally worth
what its monetary benefits and risks can be expected in the future.

Those financial projections have an incidence in its market price
but rarely coincide fully with it.
To make a valuation is to estimate its range of potential prices.

To value your assets, look at the signal future!

As expected  sousincomes are the key to
asset valuation.
.

Objectives and criteria of valuation

"What to expect" is the game

Before deciding to invest in or divest from an asset, investors try normally
to determine what it might be worth.


Let us give a definition of that expected value, as seen from their side,
with a near-tautology, as platitudes might have their ...value.

An asset valuation is normally
an estimate of the asset's potential value.

Obviously that value is related to the rewards the owner expect from the
asset, and more specifically, for a financial or economic asset, the
revenues
it can bring
. Therefore:

  • The valuation of an asset / an investment takes usually into account, 
the most probable future cash flows this asset might bring.

This entails normally to do several projected scenarios

(therefore a éventail range of valuations).

There are two kinds of cash flows

1) For an income-producing asset, the annual positive cash flow
     = the expected revenues, R1, R2, R3, ...
         less of course the negative ones (expenses E1, E2, E3, ... )


2)
The final expected asset resale / refund RX at the end 
      of the holding period
  • The investor, or its favorite analyst,
after spotting all those probable cash flows, discounts them,
year after year, with a return rate that includes a
risk premium.
Yes
, risk-taking has a price !
  • Then it adds up those results.
The total sum can be called the "estimated economic value"
(or the "estimated present value" in mathematical language)
  • And uses a psychosociological coefficient (*)
with which to adjust that total estimate.That coefficient takes into
account the favorable (above 1) or unfavorable (below 1) "market
sentiment".

A typical example is the
stock image, a coefficient used when
the asset is listed in (or related to) the stock market,
=> Main article on that topic: Stock valuation
Needless to say, although considered objective and rational, that method
entails (at all steps) some subjectivity in the previsions and assumptions.  
In economic life, and in human life in general, fog uncertainties abound.
=> Thus, whatever the method, a valuation is most of the time an
      estimate
, and sometimes just an educated guess.


With a broader approach,
what to call an asset value?

So many different notions behind a phrase!
Pick and choose!

There are several notions of gem
value.
Some of them can be applied to assets:
...supposing there is a real / reliable market (with enough
players, frequent transactions, single price...).
  • The  fundamental / intrinsic value is actually an estimate.
It is based as objectively as possible on the asset's "fundamentals"
(itsmain
microscope  traits and econsector economic performances)
and
its most probable telescope prospects (the expected cash
flows, as seen above).

It is a theoretical value, an educated estimate / valuation (the
"estimated economic value" as we called it above), a Grail that
trustworthy experts or analysts are considered able to find.

But the buyers and sellers might not share their views, and
they are the deciders after all!
  • The market-based value is the fundamental value corrected by
elements (prices...) drawn from market comparisons
(the potential value seen above).
  • Utility is the personal value of the asset for a personperson.
It takes into account its situation and preferences.
  • The fair value is an ambiguous notion.
It depends from what side to see it.
    • For a valuation expert,
It can be a unique value, the most probable / average
potential price.
But it is more prudent that the valuator supplies a
 éventail range of potential prices
according to various scenarios to leave the buyers / sellers
with a full knowledge and latitude to make their decisions.
    • For an economist,
it is the value that is supposed to favor the best allocation
of resources
.
    • For a moralist,
it is an ethical value that respects some moral and social
purposes ...or tenets.
it relates mostly to the fundamental value mixed with
some market criteria.
It is either:
    • the market value when available,
    • or an intrinsic or market-based value if not.
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M.a.j. / updated :06 Aug. 2015
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