What is Book Value Valuation ?
The accounting net
worth of a business – total assets minus total liabilities is called book value
valuation. Assets are valued at their adjusted cost basis minus depreciation.
The book value does not take into consideration certain unrecorded assets and
liabilities such as the current value of goodwill, customer lists or lease
obligations.
In Valuation method
we have seen a customer ready to give money only for Machineries with all
Accessories including Building and Land. His prediction is nearest Book Value.
In Book Value, he tried to buy that Industry. But the Owner refused. Companies
or Stocks Book Value exactly calculating and with that Company / stocks value
discovering is called Book Value Valuation Method.
Calculating all
Business with Book Value is not suitable. For Example, you are owning a
Departmental store. You have started that store , nearly 10 years back. Your
stores present Machineries with Accessories value can be taken as Rs.10 Lakhs.
Your stores Annual Net Profit can be taken as roughly Rs10 Lakhs. If you will
be ready to sell that share in Book Value ? Just think!
So, we can conclude
that each valuation method is suitable for some sort of Business only. For
service oriented Industries book value method doesn’t suit. Capital Intensive
told as Large Capitalization Business can be calculated with the book value
valuation method. ( Shipping, Electricity Production, Banking, and Finance
sectors )
Likewise several Old
Economic Business can be valued through Book Value Method. Which stocks can be
bought lesser than the Book Value? Which Company stocks can be bought?
Absence of more
growth sectors / stocks , more debts present companies, can be available in
less than book value. In our country
1) During Economic problems felt (or)
2) In, Good companies ,problems raised (or)
3) The, Good companies when not familiar to
the World.
During those times
the companies / company stocks can be available less than book value. Even in
those times, better Track record present, Quality Organizational stocks can be
bought , which may be better.
Even several times
companies portray their purchased asset value in book. In those stocks the
value may be hidden. While Analyzing those stocks and purchasing we can yield
attractive gains.
In the past 10 to15
years in our country Real estate sector has raised well. Several organization
even today predicting their real estate in the purchased rate as in older years
in the book. Recently in north India
Using book value
valuation method must be handled carefully. After creating “PEER GROUP”, P/BV
(stock market price/ book value) founded and compared with, which stock is suitable
for investment can be worked out. Separately using a stocks book value or using
P/BV alone don’t invest. Because some companies available very lower than the
Book Value may be in a Horrible situation. So, using “PEER GROUP” comparing
with some other stocks / Business execute the Investment.
Tangible book value.
Book value minus
intangible assets (goodwill, covenant not to compete, etc.). This method only
records the assets that can be collateralized. It is most often used by financial institutions.
Adjusted tangible
book value.
Adjusts the tangible
assets up or down to their fair market value. It tells what the liquidation
value of a business is most likely to be.
It is sometimes used in place
of book value for
buy/sell agreements.
MARKET PRICE VALUATION METHOD ;-
Advantages :-
In Economy (or)
specified sector / companies while occurring problems the demand of those
stocks / companies will be low. So, in those times, from its real value the
prices will be available in very low cost.
For Example :-
1) S.K.F. Bearings a Multinational Company,
Rs.125 /- reduced in Year 2008. Now its value is Rs.
2) Likewise 2008- 09, VOLTAS
stocks reduced to Rs.33/-.( During 2007-2008, a maximum of Rs.250/- )Now it
cost is Rs.
So, even Market
value is most Transparent value method, we have to know how Effectively use for
our own.
Disadvantages :-
In valuation we have
seen a person comparing the market price for buying a Residential House. In the
market, persons buying / selling being ready cost is the calculation used
for this method. In this method the positives and also the negatives (like any
other method) are also present. First we can see the Negatives,
Market price is
derived with various factors. Among those the important one is Demand and
Supply. Market rising to the Top and Touching the Bottom line are casual
incidences. But many amateur people within us , buy in the Top of the Sensex
and with scolding in the Bottom of the market position is found common.
While Market being in
the Top several stocks / companies value, deand being more, the values will be
at the Top. Similar instances are not alone common for small investing but even
for Giant Companies like TATA.
In 2007, TATA Steel
Company purchased, Britain Britain
Market Price Method
Estimates economic values for ecosystem products or services that are
bought and sold in commercial markets.
The market price method estimates the
economic value of ecosystem products or services that are bought and sold in
commercial markets. The market price method can be used to value changes in
either the quantity or quality of a good or service. It uses standard
economic techniques for measuring the economic benefits from marketed goods,
based on the quantity people purchase at different prices, and the quantity
supplied at different prices.
The standard method for measuring the
use value of resources traded in the marketplace is the estimation of consumer surplus and producer surplus using market price and quantity data.
The total net economic benefit, or economic surplus, is the sum of consumer
surplus and producer surplus.
This section continues with an example
application of the market price method, followed by a more complete technical
description of the method and its advantages and limitations.
Hypothetical
Situation:
Water pollution has caused the closure of a commercial fishing area, and agency
staff want to evaluate the benefits of cleanup.
The market price method was selected in this case, because the primary resource
affected is fish that are commercially harvested, and thus market data are
available.
Application of the Market Price Method:
The objective is to measure total economic surplus for the increased fish harvest that would occur if the pollution is cleaned up. This is the sum of consumer surplus plus producer surplus. Remember that consumer surplus is measured by the maximum amount that people are willing to pay for a good, minus what they actually pay. Similarly, producer surplus is measured by the difference between the total revenues earned from a good, and the total variable costs of producing it. Thus, the researcher must estimate the difference between economic surplus before the closure and economic surplus after the closure.
The objective is to measure total economic surplus for the increased fish harvest that would occur if the pollution is cleaned up. This is the sum of consumer surplus plus producer surplus. Remember that consumer surplus is measured by the maximum amount that people are willing to pay for a good, minus what they actually pay. Similarly, producer surplus is measured by the difference between the total revenues earned from a good, and the total variable costs of producing it. Thus, the researcher must estimate the difference between economic surplus before the closure and economic surplus after the closure.
Step 1:
The first step is to use market data to estimate the market demand function and consumer surplus for the fish before the closure. To simplify the example, assume a linear demand function, where the initial market price is $5 per pound, and the maximum willingness to pay is $10 per pound. The figure shows the area that the researcher wants to estimate ? the consumer surplus, or economic benefit to consumers, before the area was closed.
The first step is to use market data to estimate the market demand function and consumer surplus for the fish before the closure. To simplify the example, assume a linear demand function, where the initial market price is $5 per pound, and the maximum willingness to pay is $10 per pound. The figure shows the area that the researcher wants to estimate ? the consumer surplus, or economic benefit to consumers, before the area was closed.
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At $5 per pound, consumers purchased 10,000
pounds of fish per year. Thus, consumers spent a total of $50,000 on fish
per year. However, some consumers were willing to pay more than $5.00 per
pound and thus received a net economic benefit from purchasing the fish.
This is shown by the shaded area on the graph, the consumer surplus. This
area is calculated as ($10-$5)*10,000/2 = $25,000. This is the total
consumer surplus received from the fish before the closure.
Step 2:
The second step is to estimate the market demand function and consumer surplus for the fish after the closure. After the closure, the market price of fish rose from $5 to $7 per pound, and the total quantity demanded decreased to 6,000 pounds per year.
The second step is to estimate the market demand function and consumer surplus for the fish after the closure. After the closure, the market price of fish rose from $5 to $7 per pound, and the total quantity demanded decreased to 6,000 pounds per year.
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Thus,
the economic benefit has decreased, as shown in the figure. The new
consumer surplus is calculated as ($10-$7)*6,000/2 = $9,000.
Step 3:
The third step is to estimate the loss in economic benefits to consumers, by subtracting benefits after the closure, $9,000, from benefits before the closure, $25,000. Thus, the loss in benefits to consumers is $16,000.
The third step is to estimate the loss in economic benefits to consumers, by subtracting benefits after the closure, $9,000, from benefits before the closure, $25,000. Thus, the loss in benefits to consumers is $16,000.
Step 4:
Because this is a marketed good, the researcher must also consider the losses to producers, in this case the commercial fishermen. This is measured by the loss in producer surplus. As with consumer surplus, the researcher must measure the producer surplus before and after the closure and calculate the difference. Thus, the next step is to estimate the producer surplus before the closure.
Because this is a marketed good, the researcher must also consider the losses to producers, in this case the commercial fishermen. This is measured by the loss in producer surplus. As with consumer surplus, the researcher must measure the producer surplus before and after the closure and calculate the difference. Thus, the next step is to estimate the producer surplus before the closure.
Producer surplus is measured by the
difference between the total revenues earned from a good, and the total expense of producing it. Before the
closure, 10,000 pounds of fish were caught per year. Fishermen were paid
$1 per pound, so their total revenues were $10,000 per year. The variable
cost to harvest the fish was $.50 per pound, so total variable cost was $5,000
per year. Thus, the producer surplus before the closure was $10,000 -
$5,000 = $5,000.
Step 5:
Next, the researcher would measure the producer surplus after the closure. After the closure, 6,000 pounds were harvested per year. If the wholesale price remained at $1, the total revenues after the closure would be $6,000 per year. If the variable cost increased to $.60, because boats had to travel farther to fish, the total variable cost after the closure was $3,600. Thus, the producer surplus after the closure is $6,000 - $3,600 = $2,400.
Next, the researcher would measure the producer surplus after the closure. After the closure, 6,000 pounds were harvested per year. If the wholesale price remained at $1, the total revenues after the closure would be $6,000 per year. If the variable cost increased to $.60, because boats had to travel farther to fish, the total variable cost after the closure was $3,600. Thus, the producer surplus after the closure is $6,000 - $3,600 = $2,400.
Step 6:
The next step is to calculate the loss in producer surplus due to the closure. This is equal to $5,000 - $2,400 = $2,600. Note that this example is based on assumptions that greatly simplify the analysis, for the sake of clarity. Certain factors might make the analysis more complicated. For example, some fishermen might switch to another fishery after the closure, and thus losses would be lower.
The next step is to calculate the loss in producer surplus due to the closure. This is equal to $5,000 - $2,400 = $2,600. Note that this example is based on assumptions that greatly simplify the analysis, for the sake of clarity. Certain factors might make the analysis more complicated. For example, some fishermen might switch to another fishery after the closure, and thus losses would be lower.
Step 7:
The final step is to calculate the total economic losses due to the closure—the sum of
lost consumer surplus and lost producer surplus. The total loss is $16,000 + $2,600 = $18,600. Thus, the benefits of cleaning up pollution in order to reopen the area are equal to $18,600.
The final step is to calculate the total economic losses due to the closure—the sum of
lost consumer surplus and lost producer surplus. The total loss is $16,000 + $2,600 = $18,600. Thus, the benefits of cleaning up pollution in order to reopen the area are equal to $18,600.
How Can the
Results be Used?
The results of the analysis can be used to compare the benefits of actions that
would allow the area to be reopened, to the costs of such actions.
Summary of
the Market Price Method
The market price method estimates the
economic value of ecosystem products or services that are bought and sold in
markets. The market price method can be used to value changes in either the
quantity or quality of a good or service. It uses standard economic
techniques for measuring the economic benefits from marketed goods, based on
the quantity people purchase at different prices, and the quantity supplied at
different prices.
For those resources for which markets
exist, economists determine individuals’ values by observing their preferences
and willingness to pay for the goods and services at the prices offered in the
market. The standard method for measuring the use value of resources
traded in the marketplace is the estimation of consumer surplus and
producer surplus using market price and quantity data. The total
net economic benefit, or economic surplus, is the sum of consumer surplus and producer surplus.
Applying the
Market Price Method
The market price method uses prevailing
prices for goods and services traded in markets, such as timber or fish sold
commercially. Market price represents the value of an additional unit of
that good or service, assuming the good is sold through a perfectly competitive
market (that is, a market where there is full information, identical products
being sold and no taxes or subsidies).
Application of the market price method
requires data to estimate consumer surplus and producer surplus. To
estimate consumer surplus, the demand function must be estimated. This
requires time series data on the quantity demanded at different prices, plus
data on other factors that might affect demand, such as income or other
demographic data. To estimate producer surplus, data on variable costs of
production and revenues received from the good are required.
Advantages of
the Market Price Method
- The
market price method reflects an individual's willingness to pay for costs
and benefits of goods that are bought and sold in markets, such as fish,
timber, or fuel wood. Thus, people’s values are likely to be
well-defined.
- Price,
quantity and cost data are relatively easy to obtain for established
markets.
- The
method uses observed data of actual consumer preferences.
- The
method uses standard, accepted economic techniques.
- Market
data may only be available for a limited number of goods and services
provided by an ecological resource and may not reflect the value of all
productive uses of a resource.
- The
true economic value of goods or services may not be fully reflected in
market transactions, due to market imperfections and/or policy
failures.
- Seasonal
variations and other effects on price must be considered.
- The
method cannot be easily used to measure the value of larger scale changes
that are likely to affect the supply of or demand for a good or service.
- Usually,
the market price method does not deduct the market value of other
resources used to bring ecosystem products to market, and thus may
overstate benefits.
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