TUTORIALS

Fundamentals of Asset Valuation

Valuation is the method that associates risk and return to interpret the value of an asset. It is a fairly simple procedure that can be practical to probable torrents of benefits from bonds, stocks, income properties, oil wells and other financial instruments. In order to identify an asset’s worth at a given point of time, a financial manager uses the time-value-of-money methods as one of the methods to figure out such.

Three Inputs On Valuation

Valuation Process relies on three aspects in order to be processed. Such factors are: The cash flow, timing and measure of risk in which can result to what we can call as the required returns.

The cash flow or returns as a factor is expected to provide over the ownership period as any asset depends on this. In order to get the worth, an asset does not have to run an annual cash flow; it can deliver a sporadic cash flow or even a single cash flow given a specific period.

Timing as a factor determines the timeliness in which adds to the cash flow for a much better valuation result. The total combination of cash flow with the timing fully defines the return expected from the asset.

Lastly, the risk and required return: the level of risked linked with a certain cash flow can suggestively affect the general value. Usually, the higher the value of risk of cash flow, the lower value of valuation can result. Greater risk can be added on to a valuation analysis by using higher required return or discount rate. The higher the risk, the greater the required return, and the lower the risk, the less the required return.

Importance

Having knowledge about what an asset is worth and what regulates it is a precondition for an intelligent decision making specially when selecting savings for a portfolio, in determining the suitable price to pay or obtain in an annexation and in building asset, funding and dividend selections when administrating a corporate. The principle of valuation is that we can make judicious estimates of value for the utmost assets, and that the similar essential philosophies control the standards of all categories of assets, the tangible ones as well as commercial.