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    You are at:Home » Meaning of Value and Valuation

    Meaning of Value and Valuation

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    By InfoDesk on June 24, 2021 Business Studies

    The value and valuation are the two important aspects of every business organization. If they do not properly use the stakeholder or prosperous investor or management can not able to takes important decisions. In the below paragraph they are discussed compactly so that it will be useful to the present work.

    Meaning of Value

    Value and ValuationIn our commerce and finance, perspective the Cost Accounting association (ICWAI) defines value as a worth of tangible or intangible things from which benefits are expected to arise. They also define value as the purchasing power of an object and the desirability and utility of a thing which can be saleable in the market. Whatever the types of definition may be given by different authors from a different perspective one thing is common that the subjects which have value have weight to fulfill the want of people and people can live comfortably if he has enough valuable objects. The value can be definable in many perspectives but we only concentrated the discussion on the business and finance perspective. In a business, perspective value means an economic measure reflecting the value of a business is known as firm value. There have many types of firm value such as the market value of the firm, the book value of the firm, and the relative value of the firm. In general, it is a sum of claims by all claimants such as creditors (secured and unsecured) and shareholders (preferred and common). Enterprise value is one of the fundamental subjects used in business valuation, risk analysis, financial modeling, portfolio analysis, and accounting. There have many methods that determine the firm value. For example Firm value determined by the investor’s perception toward the value of the success of the firm related to its stock price (Sujoko and Soebiantoro, 2007) helps to determine firm value. The stock price indicates or measures the firm value. The stock price is generally determined when it traded in the market (Fakhruddin and Hadianto, 2001). The firm value can be measured by the price to book value (PBV) ratio. It is a relative valuation method. It is the comparison between the book value per share and stock price (Brigham and Gapenski, 2006). It helps to compare the price of the stock market and the price to book value. The larger PBV will increase the market trust of the investor. It also helps to understand how the prospect of the firm and the prosperity of the shareholder (Soliha and Taswan, 2002). PBV also helps to understand whether the stock traded in the market is overvalued or undervalued (Fakhruddin and Hadianto, 2001).

    Meaning of ‘Valuation’

    The valuation processes were first developed in advanced countries. According to Morgan’s study (1998) by the year 1868, England was the pioneer country wherefrom valuation processes were started but Miller and Markosyan (2003) found in the USA from 1902 the valuation appraisal professional start working on valuation of the asset for real estate appraisal. The USA proposed this year as the birth year of the valuation processes. During the early 20th-century other country valuation bodies also developed and it accelerated the economic growth of that time. Valuation is a complex method of determining the price of an asset or company. Changes in economic, business and environmental factors are inducing to development valuation processes continuously (Wyman et al., 2011). So many methods of the valuation process were developed during the last decades. But the applicability of the said methods depends on the perspective for which it would be applicable. Baum & Crosby (2008) had said understanding of the business valuation methods would be critical if we don’t understand the methods when to evolve and what context within which these changes took place. In our present globalization era, the task of valuation becoming a more complex and important job for good corporate reporting purposes. This leads to formats international valuation sander committee whose functions are to create standard valuation methods and to formalize the valuation terminology and methodology. According to the Indian accounting body (ICWAI), Valuation means the estimation of a thing worth or price set on a thing. There are many techniques used to determine the value of a business organization. A business analyst placing the value of a company looks at the firm’s management, the pattern of its capital structure, the prospect of future return, and the market value of its assets. Company valuation is a process used to estimate the economic value of an owner’s interest in a business organization. Valuation is used by a seller or purchaser to determine the price they are willing to pay or receive for the sale of an object. There are many business valuation methods that are broadly grouped into three categories. Depending upon the situation any one of these three approaches is used for business valuation. Each approach serves as a basis for a group of methods to determine the business value. The three approaches are the Income approach, the market approach, and the Asset approach. According to Fernandez (2013) and Damodaran (2005), there are five valuation approaches present, all of them with many valuation methods which are,

    • a) Discounted cash flow (DCF) valuation,
    • b) Accounting and Liquidation valuation,
    • c) Relative valuation,
    • d) Contingent claim valuation (real options) and
    • e) Goodwill valuation.

    A comprehensive business valuation technique should include a choice of several models under the above approaches.


    For citing this article use:

    • Roy, K. (2020). Impact of risk on corporate valuation a study of BSE500 companies.
    Business
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