Valuation

economic-dictionary

Valuation is the numerical calculation that is carried out in order to assign a monetary value to a certain asset, property or investment.

In other words, the valuation estimates the value of a home, a company, a project, as well as other assets that can be sold.

The valuation is not subjective, but must be carried out based on objective and measurable criteria, and in addition, it must be carried out by professional specialists such as economists, architects or engineers, depending on the case. Sometimes these specialists, when it comes to valuations used to pay taxes, for example, are government officials.

And it is that, in some situations, it is essential to carry out the valuation of an asset, for example, when the authority requires it to calculate the tax as a percentage of the value of a property.

Valuation example

An example of valuation can be when a company is going to start trading on the stock market. Then, it is necessary to estimate the value of the firm to divide this by the number of shares and thus determine the value of each share.

To calculate the value of a company, as we will explain later, several procedures can be followed. But suppose that in this case the future cash flows are taken, taking them to present value based on a discount rate.

Valuation of companies

The valuation of companies, as we explained in the previous section, is required when the firm begins to trade on the stock market. However, it is also carried out within the framework of an acquisition or merger process with another company.

In this sense, it is important to note that a correct valuation will depend on the thoroughness of the accounting. That is, a valuation will not be accurate if the firm, for example, has not correctly recorded the depreciation of any of its assets, which is worth less than what is recorded in the accounting books.

There are different methods of valuation of companies, such as the theoretical book value. This consists of calculating the difference between the assets that a firm has and its liabilities or payment obligations.

Another way to value a company is based on the value of a similar firm, that is, the companies must be similar in indicators such as the PER ratio. This is a financial ratio that compares the price of a share with the earnings per share (EPS) of the organization.

Finally, as we mentioned in the previously explained example, the value of a company can be calculated by discounting the cash flows projected in the future. These are carried at present value using the opportunity cost of capital as the discount rate.

Valuation of a property

The valuation of a real estate is carried out through an appraisal, which is a procedure by which a professional (or group of professionals) evaluates the property to determine its theoretical monetary value.

The appraisal takes into account different factors such as location, surface, distribution, conservation, the materials used and the market price.

In addition, it is worth clarifying that the value of a property can vary over time. This, due to internal variables (such as improvement of the finishes) and / or external (such as an increase or decrease in the valuation of the area).

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